Saturday, July 5, 2008

Jack Guttentag on Zillow's Mortgage Marketplace

(Washington Post) Zillow, a popular real estate Web site, now has a complementary mortgage site where neither lenders nor borrowers pay for the service.

Prospective borrowers fill out a long questionnaire, similar to a mortgage application, except the borrower's identity is not disclosed. The questionnaire is made available to all participating loan providers, who are defined as individual loan officers or brokers rather than firms. Any lender may submit price quotes along with information about itself. Borrowers also have access to ratings other borrowers have given the loan providers. The borrower's identity is revealed only when he contacts specific lenders, and only to those lenders.

The anonymous process allowed me to kick the tires, and I received quotes from six loan providers on my fictitious house purchase in Valley Forge, Pa.

The Web site, Zillow Mortgage Marketplace, has some features I really like. One is placing the initiative to select a loan provider in the borrower's hands. This is in sharp contrast to lead-generating sites such as LendingTree.com and LowerMyBills.com, where three or four firms selected by the site pay for the right to contact the borrower. Identifying loan providers as individuals rather than firms is a good idea. Real estate agents have always used this approach because even the best firms may harbor incompetents or rogues.

Zillow has also done a good job in designing a uniform format that all loan providers must use to quote prices. All quotes are comparable and are shown on one screen. Each shows the type of loan, interest rate, annual percentage rate, total lender fees and monthly payment. The user can click on the quote of any provider and get more information, including critically important details about adjustable-rate mortgages.

Shopping anonymously should appeal to borrowers because it means they can control the process, select who they want to deal with and not be harassed by others. But anonymity comes at a price. No loan provider is going to invest a significant amount of time on anonymous borrowers, so they provide a quick quote, include a prepackaged testimonial about how good they are and how much they would enjoy working with you, and leave it at that. They don't even bother keeping their quotes up to date.

For example, I signed on over Memorial Day weekend. On Tuesday, I received quotes from six loan providers. I didn't get to check back until Thursday, and over those two days, market rates had jumped almost 0.25 percent. None of the providers had bothered to update their quotes. Maybe if rates had gone down instead of up, they would have. I don't know.

The major weakness of Zillow Mortgage Marketplace from a borrower's perspective is that the price quotes don't really mean anything, so using them as the basis for selecting a loan provider is hazardous. Further, Zillow is unhelpful in indicating what the price quotes do and don't signify.

Why don't they mean anything? Because, at best, a quoted price is the price the loan provider could deliver, provided that the borrower could be approved for the loan and that when given approval, the price could be locked immediately.

But the loan provider is guessing about approval. It is an educated guess, based on the information provided by the borrower, which is extensive. The loan provider can't confirm the information, however, and can't run it through an automated underwriting program because that would require an identifiable borrower.

In a world where underwriting requirements have substantially tightened, this is a problem. It is not unique to Zillow, but I would expect the site to explain it.

The second assumption underlying a price quote is that the loan can be locked immediately, which of course it can't -- the borrower has to apply and be approved first. This means the loan provider can't be held to a quote, which creates a temptation to lowball the price to be the provider the borrower contacts.

Zillow does have some things to say to loan providers about this. First, it warns providers not to lowball because it will be reflected in poor ratings, which will hurt in the long run. That's fine.

Unfortunately, Zillow also tells loan providers, "We expect you to stand by your quote if the information provided by the borrower is accurate." That says price quotes are locks, which is ridiculous. No lender can lock a price in a volatile market without a commitment. This impossible standard can only confuse borrowers.

Zillow should explain to borrowers the assumptions underlying price quotes and impose reasonable requirements on lenders. I would have it quote prices for a minimum of three days, which would be highly educational for borrowers. Zillow can also suggest that when borrowers contact a provider, they ask that quotes be kept current until the price is locked.

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