Are Consumers Getting What They Deserve?

An old maxim says that people get what they deserve and I’m not going to argue with it. The mortgage business probably holds most of the records for consumer unfriendliness and I wonder if there is a correlation here. Do mortgage shoppers get what they deserve? Is that why they are unhappy?

Let me make another observation. About ten years ago I saw a study comparing shopping habits of Europeans versus Americans. The conclusion was that Americans were far more price sensitive than Europeans, placing low price far above other considerations such as quality, service, or loyalty to the provider. In fact, the study actually made fun of us because of our obsession with price. By comparison, Europeans know that it is a poor practice to buy cheap stuff that breaks or wears out.

My strongly held opinion is that most homebuyers don’t do a very good job of shopping. More particularly, they have wrongly focused on initial costs of a loan instead of the total cost over the period of home ownership. I see the mortgage shoppers’ fixation on upfront costs of a loan as being another manifestation of our national proclivity.

Let’s look at this from the point of view of a large lender. Assume that 1,000 people calling the company inquiring about loans. In the old days, experienced, career loan officers would try to convert these prospects into clients by counseling them as to how the company’s loans would meet their needs.

But more and more people are calling and just asking, “What are your costs?” You don’t need a highly trained cadre of loan officers for this. You can get an 800 number, establish a call center, and hire minimum wage people to answer the phones. And speaking to a topic of current political interest, you can even move the whole operation to offshore and hire people in underdeveloped countries. Yes, that is happening in our industry.

There is no question that if you replace your staff with people making a lot less than what the old ones were making, you can provide a lower “cost” alternative to the phone shoppers. The shoppers will, naturally, be attracted to this and will do business with you.

So what is the problem? I have dealt with over 3,000 borrowers in my career – over 6,000 if you count spouses – and I can tell you that almost all of them had questions. Knowledgeable answers to those questions lead to lower total cost.

For every $100,000 in loan amount loan borrowers will pay over $115,000 in interest over the life of the loan. Minimizing that total cost is what is important, not saving a couple of hundred dollars in upfront costs. There are questions to ask that will reduce that cost substantially, which is why I wrote the books and these articles.

The problem is that most people don’t know which questions to ask. That may not make any difference because the people at the call centers don’t know the answers anyway. All they know is how to read the scripted answers they have been given.

This means that the borrowers’ insistence upon a “low upfront cost model” has lead them into a situation where they may think that they are saving a little bit upfront, but they end up paying ten or twenty times that much in excess interest. Indeed, many mortgage ads talk about nothing else. The lender promises closing costs of, say, $395. The dumb shopper doesn’t ask, “What do I get for $395?” You can be assured that it is NOT as good a loan as others are getting, but as long as they are focusing on the $395, they miss the important questions.

In summary, American consumers aren’t demanding very much from our industry, and they’re getting it. What they deserve are thoughtful, accurate answers to all of their questions. They aren’t getting them and, sadly, they don’t even know what they are missing. I hope that when you shop for a mortgage or other financial service, that you don’t stop asking questions. If you don’t get good answers move on.

Be careful out there.