3 borrowers, 3 different needs
Editor's note: This is Part 5 of a five-part series.
Earlier articles in this series described how certified lender networks will assure borrowers of competitive pricing on mortgage loans and required accessory services, and provide the decision supports that help borrowers make sound judgments. But an effective network cannot be based on the assumption that one size fits all.
Borrowers range very widely in their general intelligence, financial knowledge, computer skills and self-confidence. Having fielded approximately 40,000 letters from borrowers over the last 12 years, I am perhaps uniquely positioned to appreciate just how wide the disparities are from one borrower to another. Why would anyone ever believe that one channel can properly meets the needs of all potential mortgage borrowers?
The networks under development will be geared to deal with three groups of borrowers: professionals, independents, and the challenged.
The emerging networks will create three origination channels for these three groups of potential borrowers. Borrowers will select their preferred channel based on their needs.
The channel for professionals
The professional channel is designed for borrowers who know their market status and the kind and features of the loan they want. They have no need to be qualified and don't want to fill out the long form that qualification requires. Nor do they require any decision support. The professionals will use the network to obtain their loan primarily because they want the assured competitive pricing and transparency that the network provides. They are not a major part of the total market.Â
The professional channel has much in common with lead-generation sites, which also do not qualify borrowers and provide minimal decision support. The major difference is that borrowers who use the professional channel will select the certified lender or lenders on the network they want to shop. The network will charge each lender contacted by the professional.
In contrast, lead-generation sites choose the lenders to which they sell information about the borrower; usually they sell to the three or four lenders who will pay the most for the lead.
The channel for independents
Independents are borrowers who need and are comfortable in using the guidance and protection provided by the network. This channel asks for more information from the borrower than the channel designed for professionals because the transaction is underwritten and priced before there is any contact between the borrower and the lender. This is what makes possible both the integrated assistance to the borrower in making critical decisions and the protections provided against overcharges.
The channel for dependents
This channel offers the same online guidance and protections as the channel for independents. The difference is that dependent borrowers select disinterested but expert counselors to help them navigate through the process. The system is the same but the borrower has a counselor who will be with them from start to finish.
Counselors will be required to pass an examination that demonstrates their competence in advising borrowers. In this sense, counselors will be certified by the network as lenders are. Counselors will also be rated by the borrowers they work with.
Counselors will be paid a fixed fee per borrower, regardless of whether a loan is closed. Borrowers will select a counselor by examining the personal information pages that will be available to them on all counselors. The pages will include ratings of the counselors by other consumers who have used them, in addition to other relevant data including prior experience and physical location.
Do not confuse network counselors with mortgage brokers. Brokers do not get paid unless a loan closes, and their fee is a markup over the wholesale price, which places them in a conflict position with the borrower. Network counselors will have no such conflict.
Mortgage brokers are self-selected and state requirements for licensing have little to do with demonstrated competence. Network counselors, in contrast, will be tested not only for their general mortgage knowledge, but for their ability to navigate the network system and deploy and explain the network decision aids.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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