Borrowers will no doubt be drawn to the mortgage rate tool from the Consumer Financial Protection Bureau when it comes time for them to do some home shopping.
On the Huffington Post, Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania, gives several perfect reasons for why they shouldn’t do that.
“My advice to borrowers: ignore the CFPB tool, it is completely useless. The tool a borrower needs is a "shopping rate," a rate that a competing lender should match or better. CFPB shows a distribution of rates, and leaves it to the shopper to decide which rate in the distribution is the shopping rate, while providing no guidance on how to do it.”
Several mortgage groups asked for the tool to be taken down.
Even so, the CFPB said that’s not going to happen.
Guttentag lists four additional reasons why the CFPB tool does not not meet a homebuyer’s shopping needs. According to him, the CFPB doesn’t consider four factors that would create a “valid shopping rate” for potential homebuyers.
Guttentag reasons that a good rate should come from competing sources. The CFPB uses input from larger banks and others. “This means that the rates come from a hodgepodge of market structures, which could range from highly competitive to local monopoly.”
2. Transaction timing
As everyone in mortgage lending knows, rates are ever moving. The weekly mortgage rate article from Freddie Mac, dutifully covered by HousingWire week in and week out, gives a good idea where rates are headed, but never considered a worthy, tradable scale. Most lenders update rates in the morning.
“The rate that shoppers will find on the CFPB site, in contrast, '...is updated every business day in the evening.' This means that it is always stale.”
3. Lender Fees
This is perhaps Guttentag’s most concerning point; the way the mortgage tool estimates lender fees. In this regard, the CFPB may actually allow a homeowner to get ripped off. Not good.
“The rates posted by CFPB are for loans with points between -0.5 and +0.5% of the loan, but fixed-dollar fees are not specified. This means that a lender can meet the CFPB shopping rate presented by a shopper, yet over-charge the borrower by padding the fixed-dollar fees.”
4. Transaction Features
The CFPB fixes five factors that make the individual’s shopping fee impossible to calculate. For example, fixing the tax and insurance escrow does not provide as useful a service as one that is more up-to-date.
“For a shopping rate to be valid, it must apply to the individual shopper's transaction. A shopper looking to buy tomatoes is not helped by being told a competitive price for apples.”