How the Opaque Mortgage Industry Hurts Consumers

Mortgage shopping is a drag; here's why regulators should make it easier.

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A price-reduced home.

Experts often advise mortgage borrowers to "shop around." But although it seems that phase is heard ad nauseum, according to government mortgage giant Fannie Mae, many consumers still do not "adequately investigate or fail to understand fully the choices available to them" when it comes to selecting a home loan.

It's true that mortgage shopping is hard, frustrating, and time consuming. But, not shopping around can be incredibly costly to borrowers. The study notes that borrowers who get only a single quote might overpay by $1,000 or more in closing costs. That doesn't even take into account any difference in interest rate.

Frankly, there's no better way to know what your options are than to contact lenders and compare offers. That said, existing regulations and lender marketing practices make this a difficult process, and it's an area the Consumer Finance Protection Bureau should be addressing.

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If you call mortgage retailers to obtain a mortgage quote, chances are that you'll be put through a battery of questions, asked to reveal your Social Security number, or even be told you'll need to come in to start an application before you can find out the loan's rates and fees. What other business line requires you to reveal personal financial information just to obtain a price of the goods for sale? It shouldn't be necessary to run a background check on a borrower just to make a reasonable approximation of a price available.

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A price-reduced home.

Perhaps a solution could be found in a "stated price" and "final price" arrangement. The consumer could give their credit score and loan-to-value ratio, and the lender could provide the estimated terms of the loan—good for a limited period of time—based on that preliminary information.

A "final price" would be subject to the borrower providing proof of their statements and would be more formal, perhaps in written form. In this way, shopping from lender to lender would be conducted in exactly the same fashion.

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A second issue is that your mortgage's interest rate is affected by the amount of fees you pay—loans with low or no fees attached to them have the highest rates, and vice versa. That means you could be attracted by a low-rate loan offer, only to later find that the fees you'll need to pay are out of line with the rest of the market.

While knowing the fees up front as you shop would be useful, regulations don't require lenders or brokers to provide you with estimates until you actually apply for a loan, and even then lenders have up to three days to provide you with a good faith estimate of them.

It's amazing that an industry that writes hundreds of mortgage loans has no clear picture of what it costs to get a loan through the process. Of course, there can be variances in costs, but those variances could be expressed in a document as a range. For instance, if you want a standard, 30 year, fixed-rate conforming loan for a single-family detached property, why is there no "standard fee sheet" available even well before you wish to apply?

[SEE ALSO: 3 Ways to Pick the Best Closing Date]

Simplifying the shopping process—making quotes easier to obtain and more comparable at the same time—could save a lot of headaches today and tomorrow. Better-informed consumers who get documents they understand in a timely manner are not only likely to get better deals, but more sustainable ones, too. Imagine how different the mortgage and housing crises might have been if borrowers had better information.

Keith Gumbinger of HSH.com is a 25-year expert observer of the mortgage and consumer debt markets. He has been cited in media outlets from CNN to NPR to the Wall Street Journal and is the primary researcher and writer of HSH.com's consumer guides and Market Trends newsletter.