Getting Wise to Mortgages;
Web Sites Help Borrowers

A few entrepreneurs are developing new tools to help home buyers tackle one of the most confusing projects they face: figuring out whether a mortgage is a fair deal.

Comparison-shopping for mortgages has long been a job only a masochist could love -- a world of "points," "ARMs" and a barrage of surprise fees. In recent years, it has become tougher amid the proliferation of complex new interest-only mortgages and others designed to enable buyers to delay more of the pain of paying off that debt.

Now, as interest rates climb, it is important for mortgage borrowers to aggressively shop around for the best terms. Over 10 years, a difference of just 0.125 percentage point on the mortgage rate on a $500,000 loan can rack up more than $6,000 in extra interest payments.

The problem for borrowers is that lenders have a vested interest in making it tough to compare rival offerings.

"The general public, they think they know how to shop for mortgages," says Mike Stoffer, who owns a mortgage brokerage in North Canton, Ohio. "They have no clue."

Some entrepreneurs are stepping in to give consumers some added muscle. One of the quirkiest tools available is a Web site, www.mtgprofessor.com, by a maverick retired finance professor who has made a hobby of skewering mortgage lenders. The site is a compilation of tutorials, calculators and a glossary defining everything from "balloon mortgage" (one that is payable in full at an early date) to "right of recission" (your right to back out of a refinancing within three days of closing).

It also has some tart words for rogue lenders from Jack M. Guttentag, the Wharton professor emeritus behind the site. Example: In one passage, he compares parts of the mortgage market with a camel bazaar -- except that the chances of being fleeced by a camel dealer are smaller.

Defending the industry, Mike Fratantoni, a senior economist at the Mortgage Bankers Association, a trade group, says: "We favor simplifying the process and making it more consumer friendly."

Another industry critic, California mortgage broker Jeff Lazerson, says he plans to launch later this year software that will let consumers get competing offers from lenders without having to give up personal data. Other sites already operating require mortgage-shoppers to give their names and sensitive information to lenders, even though they might not ultimately want to work with those lenders.

Taking Out the Mystery

Meanwhile, companies such as Fair Isaac Corp., a provider of credit-rating scores, and Bankrate Inc., a financial Web site operator, have been refining their own Web sites designed to demystify mortgage shopping. For instance, Bankrate is policing lenders to make sure the rates they offer are really available. Fair Isaac provides mortgage tips on a consumer site, www.myfico.com.

One of the biggest problems consumers face is that each lender offers different combinations of interest rates, fees and other terms, making it hard or impossible to make comparisons. It is particularly tough when you aren't getting a plain vanilla fixed-rate loan.

The best defense for consumers is to do some research before starting to shop around. For instance, sites including Bankrate.com, HSH.com and mtgprofessor.com not only explain basic terminology, but also provide a range of tutorials and tools.

Then, consumers should call several lenders or brokers and give each the same specific request. Example: "I'm willing to pay one point [1% of the loan amount] upfront to lower my interest rate. What rate would you charge? What would be the total amount of all other fees? And what is the annual percentage rate, or APR [which combines the rate and fees]?"

Those fees can be particularly tricky. Most lenders provide only estimates of total fees, which include charges for such things as appraisals or document handling. This often leaves consumers vulnerable to surprises in the form of unexpected charges added to the bill at the end of the process, when it is hard to back out and go looking for another lender.

Consumers should ask for an immediate "good faith estimate" of these fees in writing. Some lenders offer fixed-fee packages that reduce the risk of last-minute surprises. Among these lenders are SunTrust Mortgage, ABN Amro Mortgage and Ditech.com, a unit of General Motors Corp.

In part because interest rates constantly fluctuate, the lender that seems to be offering the best deal today may no longer be quoting the best one when it comes time to commit -- at which time you may be unable to shop around again. The danger is that a loan officer or broker will dangle a very low rate to get your business, then stick you with an uncompetitive rate later, explaining that the market has moved. One solution is to apply for loans at several mortgage shops and arrange for them all to make their offers to you within a few hours.

Many Web sites offer to help consumers get multiple offers. Among the best-known operators of such sites is LendingTree, a unit of IAC/InterActiveCorp. Users of LendingTree enter personal financial data, including Social Security numbers, on the site. As many as four lenders then respond with contingent proposals for interest rates and other fees.

But the catch is that these proposals aren't commitments. The lender generally needs more information before providing a definitive loan offer.

The upshot: The lender offering the best initial proposal may not be the one that will come through with the most attractive loan commitment. As a result, Mr. Guttentag warns against assuming that sites such as LendingTree will protect you from overpaying.

Allison Reed, a spokeswoman for LendingTree, concedes that the consumer needs to put in "time and work to do the research to make sure you're getting a great deal." But, she adds, "we believe that our process makes this heavy lifting easier."

Payday for Lenders

In many cases, lending officers or mortgage brokers get more compensation if they persuade you to take a loan with a higher rate or fees. Like any savvy salesperson, they can spot customers who are naive or disinclined to shop around and jack up their profit margins accordingly. James Nabors II, president of the National Association of Mortgage Brokers, says that mortgage brokers have "an ethical responsibility" to treat all customers equally and fairly and make sure they understand the loan they are getting into. Mr. Guttentag examined 774 loans a few years ago and found that two-thirds involved overcharges, rates above the best rate available on the lender's internal daily pricing sheet.

These pricing sheets show the wholesale rates at which lenders are willing to make various loans. Consumers normally don't see this data, though some mortgage brokers say they will show it if asked. Mr. Guttentag hopes to add data from pricing sheets to his site soon.

To avoid overcharges, Mr. Guttentag recommends using a broker willing to agree on his total compensation, or fee, with the borrower at the outset. Typically, those fees are a percentage of the loan or a fixed dollar amount. Having fixed the fee in advance, the broker isn't able to earn more by putting the customer into a higher-cost loan or one with prepayment penalties. On his site, Mr. Guttentag lists 134 brokers across the country who are willing to cap their fees in advance and who follow his other consumer-protection standards.

Just You and Your Mouse

For individuals willing to do more research and punch their personal data into a computer, it often makes sense to deal directly with online lenders rather than brokers or bank branches, particularly if you aren't looking for something exotic, Mr. Guttentag says. That is partly because online lenders can eliminate certain costs, such as commissions, by reaching customers through the Internet, and then pass some of those savings on to borrowers.

Many people will never have the time to even begin figuring out all the tricks of the mortgage trade. That is why Mr. Lazerson, who owns a mortgage brokerage in Laguna Niguel, Calif., says he plans to introduce later this year software designed to enable some consumers to type in their financial details and then get firm offers from several lenders, without revealing their name, address or Social Security number. One advantage is that consumers aren't then flooded with unwanted marketing material.

Mr. Lazerson last year obtained a $250,000 Ford Foundation grant to develop the software for use by nonprofit groups that help minorities and low-income individuals shop for loans. J.P. Morgan Chase has expressed interest in participating in a test of the software, a spokesman for the bank says, and Mr. Lazerson says he is talking to other lenders. Though he plans to launch Mortgage Grader as a tool for nonprofit advisers of low-income mortgage borrowers, Mr. Lazerson hopes eventually it will be available to all consumers.

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