Is a "Mortgage Simulator" Worth Your Ten Bucks?
TransUnion, one of the big three credit reporting agencies, is hawking a new service called a "mortgage simulator." If you are in the market for a new mortgage or refi, give them ten bucks and some info about the size of the loan you are aiming for, and you'll get a customized report that shows the mortgage rates that you should qualify for. Is it worth it?
What's the value proposition here?
You can always get your basic credit report for free. But as I have explained before, that doesn't include the critical FICO score that is your bottom line.
There are no shortage of sites like Bankrate.com that provide loan rates, but these are just the prime rates for the borrowers with excellent credit scores. If you have sub-prime credit, then you might as well ignore all the advertised rates, because you ain't gonna get them. Since there is no effective way for companies to advertise or compete on interest rates (much less other terms) in the sub-prime market, the market is far from economically efficient. (That's the prima facie argument for why we need regulation!)
But untill the sheriff comes to town, consumers will have to help themselves. For those who do have mediocre or bad credit, TransUnion's product might just be worthwhile, and the price is not bad considering the stakes involved with getting a nasty mortgage. If a consumer walks into a mortgage broker's office without this sort of information, they are at his mercy.
Unfortunately, the mortgage brokers are not on the consumer's side -- they want to rake in side payments from the lenders called "yield spread premiums." In short -- the worse the loan is for the consumer, the better it is for the broker. Sure enough, in our ongoing study of home foreclosures, we are finding that most of the homeowners relied only upon their mortgage brokers, or nobody at all, in getting advice about their mortgages.
Consumers can get FICO scores for a moderate fee from myfico.com, which also provides a rough mortgage rate schedule based on FICO scores. The relevant information is available, so it would not be impossible for subprime lenders to compete on price---especially since rate determinations are generally automated, so getting a rate quote is much quicker and easier now than in the past.
But not all lenders rely on FICO scores for their credit decisions. Freddie Mac, Fannie Mae, and several of the larger lenders have their own credit scores (based on raw credit data from the big three credit bureaus), which purport to be better predictors of mortgage delinquency/default than FICO. These scores are generally not available to consumers. Furthermore, small lenders are increasingly relying on credit decisions by the GSEs or larger institutions. The TransUnion product presumably tries to predict current (mean? median?) interest rates based on FICO, back-end DTI ratio, LTV, and loan type, but presumably does not reflect the numerous other situational factors that may affect available interest rates: the level of lending competition in the market, the type of property securing the mortgage, local economic conditions, local housing price trends, etc. It's a rough guide---and maybe worth $10 to otherwise poorly informed consumers to give them a rough guide to shape their expectations---but in many situations, even with this sort of information, the prospective borrower will be at the broker's mercy.
February 27, 2007 9:55 PM | Reply | Permalink