Urban Wire More Transparency in Lender Mortgage Rates Could Make Homeownership More Affordable
Laurie Goodman, Ted Tozer, Alexei Alexandrov
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Research over the past five years—using different datasets and time periods—has consistently shown considerable price dispersion in the mortgage market, with lenders charging similar borrowers different interest rates and fees. Borrowers with the same characteristics (e.g., credit score, down payment, loan amount, location, day of loan origination) might get rates that are 50 basis points apart in annual percentage rate (APR), a difference of more than $100 a month on mortgage payments for the median loan. These differences are slightly larger for loans from the Federal Housing Administration (FHA) and Department of Veterans Affairs than for loans from Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs).

Most borrowers are not even aware of the price differences, with the National Survey of Mortgage Originations showing that most borrowers believe they would get exactly the same rate at any lender. A plurality of borrowers consider only one lender seriously during their mortgage shopping process, and barely anyone considers more than two.

With mortgage costs and home prices so high, anything that can reduce up-front costs or a borrower’s payments can make homeownership more affordable. We have recently provided suggestions to lower the costs on realtors’ commissions and on title insurance. In this blog post, we show how standard and transparent benchmarks for available APRs (similar to manufacturer’s suggested retail prices, or MSRPs, for cars, books, and other products) could save borrowers up to $100 a month on their monthly mortgage bills.

Creating more transparency in the mortgage lender market

There have been multiple efforts by the Consumer Financial Protection Bureau (CFPB) to encourage borrowers to shop for lenders, but all have involved either reading detailed disclosures from multiple lenders at the same time or using tools that borrowers do not know exist. These actions have not shifted lender or consumer behavior dramatically.

We propose that a technique used frequently in other industries, the MSRP, could help in the mortgage industry as well. The FHA and the GSEs could publish a daily rate sheet for potential borrowers. As an example, the FHA (and the GSEs) could publish by 8:00 a.m. ET daily the 25th (or even the 75th) percentile of APRs for standard purchase, 30-year fixed-rate first-lien loans locked the preceding day, potentially producing three different numbers: APRs for purchase loans, refinances, and cash-out refinances.

The FHA and GSEs could require lenders to disclose this mortgage MSRP sheet to borrowers, warn borrowers when the lenders are above the MSRP, and inform borrowers of the difference in monthly payments between the MSRP and what the borrower is being offered. Some borrowers will be happy to pay more because they like the lender. But other borrowers will attempt to shop and negotiate for a better price. Research in other markets has shown that greater price transparency leads to lower and more uniform pricing.

For the mortgage MSRP to be successful, the rate presented must include various fees, not just the interest rate, to give potential borrowers an indication of the loan’s total annualized cost. The rate used for the MSRP should be the standard APR calculation, including discount points, as well as loan origination, loan processing, and underwriting fees if available at the time of a borrower’s quote request. The FHA and the GSEs should also inform borrowers of factors that could increase the rate and offer examples.

Alternatively, the MSRP could be more refined, similar to how car prices are displayed with a starting MSRP and higher tiers based on additional features. The FHA could break out the difference between a loan-to-value ratio above or below 95 percent or between different credit scores. The GSEs could do something similar but include options for first-time homebuyers, show loan-level pricing adjustments, and note that higher loan amounts might have a surcharge.

Greater price transparency can lower homebuying costs

Although current mortgage disclosure forms reasonably show borrowers the cost of mortgage they are considering, there is no way for the borrower to tell whether it is a good deal relative to other lenders. Most borrowers mistakenly believe that they will get the same deal regardless of the lender.

To make this proposal easier to implement and help aspiring homeowners get the best deal possible in a high-interest-rate environment, the CFPB could integrate an MSRP disclosure into the TILA-RESPA (Truth in Lending Act–Real Estate Settlement Procedures Act) integrated disclosure forms instead of creating another form for borrowers to read. The CFPB could also standardize which fees are reported for the MSRP calculation, which (at least at first) can be informed by commercial datasets that show daily up-to-date loan information to ease implementation. Finally, lenders can still charge high interest rates to control volume, for example, in high-volume periods like the refinance boom during the pandemic. But if the rates for a particular lender were high relative to the market, borrowers would be aware of it.

Our proposal does not mean to introduce new legal or compliance burdens for lenders. Instead, we hope it can make it easier for borrowers to obtain a mortgage at a favorable rate, potentially lowering homebuying costs. Greater price transparency will likely make lenders with high rates lower them, so their offer will stack up more favorably. Some shopping will still prove necessary for some borrowers, but the MSRP will make shopping easier by creating a clear benchmark.


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Research Areas Housing finance
Tags Housing affordability Housing finance reform Homeownership
Policy Centers Housing Finance Policy Center
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