In the home loan market, that is a critically important question.
In most markets, one party to a transaction usually has more information than
the other. The information disparity in the home loan market, however, is unusually
large. Most borrowers are in the market only a few times in their life. They
have limited time to learn the rudiments, never mind the many nuances, of an
extremely complex transaction. In contrast, the professionals on the other side
of the table know the nuances because they deal with them every day.
With that kind of imbalance, trust is critically important. Without it, borrowers
may bounce from one loan provider to another, wasting everybody’s time. Or they
may stick with one but drive him crazy with questions, demands and suspicions
that make the process unpleasant for everybody.
Most mortgage shoppers deal with this problem by following referrals. Most
referrals come from real estate sales agents, borrower/friends, and builders.
In general, I rank their reliability in the same order.
Real Estate Sales Agents: Home purchasers accept more referrals from
real estate sales agents than from all other sources combined. The homebuyer
often establishes a relationship with the agent during the house-hunting phase,
and the agent is there when the need for a mortgage arises.
Sales agents have the same interest as buyers in getting deals done. Hence,
they refer clients to loan providers who can generally be depended upon to close
on time.
Sales agents have no comparable interest in the mortgage price, and are not
concerned if the price is a little above the market. However, the agent doesn’t
want the price to be so far out of line that the borrower throws a fit and blames
the agent.
Loan providers spend a lot of time cultivating the favor of sales agents. The
law prohibits paying for referrals, but it is not enforceable and violations
occur – how frequently, nobody knows. I would much prefer a referral from an
agent who doesn’t get paid by the loan provider.
Other Borrowers: Your close friend strongly recommends a loan provider
he recently used. You know the source of the referral is trustworthy and has
no financial interest in your selection, and that’s very important. But the
opinion is based on a single experience that might be skewed – especially if
his transaction and yours are very different.
Here are some questions to put to your referral source: First, how well did
you do in the pricing, and how do you know? Did you shop other sources?
Second, how well did the loan officer do in Q and A? Was he willing to take
the time to answer your questions? Have you checked any of his answers against
other sources?
Third, how reliable was he? Did he do what he said he was going to do, when
he said he was going to do it?
Referral from a trusted source can be valuable, but only if the source has
solid reasons for it.
Builders: Builder referrals are usually to a lender with whom the builder
has a financial arrangement. Hence, they are suspect.
In some cases, preferred lenders price loans above the market and kick back
some of the excess to the builder. You can avoid this trap by shopping other
sources.
It is not so easy to avoid the trap when the builder offers a concession if
you use the preferred lender. In this case, the builder has padded the house
price, and is offering back part of what has been taken from you. If you don’t
accept it, you lose even more.
Suppose the builder pads the sale price by $5,000, but offers a concession
of $5,000 if you use the preferred lender. The lender can price the loan, say,
$3,000 above the market. If you take the loan, you are ahead by $2,000, relative
to turning it down. But you are out $3,000 compared to what you would have had
to pay if the builder had no preferred lender and didn’t pad the sale price.
The only way a buyer can avoid this trap is to refuse deals that tie concessions
to use of a preferred lender. Offer the builder the ask price less the concession.
October 8, 2001
