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Is a Mortgage a Commodity?

To many people, a mortgage is a simple loan that should be decided by the lowest price and closing costs. There is no real difference except price and rate. This is supported by the media and many in our profession. Just go with the lowest rate, APR and closing costs and you have made the right decision. All things being equal, this is good advice. But rarely are all things equal, especially in today's market place.

What is a Commodity?

Wikipedia "A commodity is something for which there is demand, but which is supplied without qualitative differentiation across a market. It is a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk. In other words, copper is copper. The price of copper is universal, and fluctuates daily based on global supply and demand. Stereos, on the other hand, have many levels of quality. And, the better a stereo is [perceived to be], the more it will cost...."

Does a Mortgage Meet this definition?

The majority of loans on today's market are purchased by Fannie Mae, Freddie Mac, the FHA, VA or guaranteed by the USDA. These have set contracts with consistent terms dictating the responsibilities of all parties involved. If the borrower meets the requirements set forth by the Investor's guidelines they qualify as a borrower. Same with their property.

Mortgage brokers, Mortgage Bankers and Depository Banks who sell their loans to these investors are all required to operate under these rules.

Once the loan is funded, it is a contract with concrete rules dictating the responsibilities of the borrower and Investor. At this point, your 30 year fixed rate loan is really no different then your neighbor's. You might have a different rate and servicer, but contractually, they are the same.

So Does This Make A Mortgage a Commodity?

On the face of it, it would seem that yes, a mortgage is a commodity. BUT, I would argue that the act of getting a commodity is not a commodity.

This commodity, a lien against your home, is affected by many variables. Some of these you have control over but many you do not. Let's break things down some and see whether or not you should treat your mortgage as a commodity or as an important decision that requires the help of a professional.

Mortgages are provided through a variety of channels. There are retail banks like Wells Fargo and Bank of America, Mortgage Bankers who do not take deposits and only offer limited financial products, and Mortgage Brokers who offer loans from a variety of Banks and Wholesale lenders. There are some hybrids, but basically these three channels are your options.

This could also be broke down as Direct Lenders (those who sell directly to Fannie, Freddie or the FHA/VA), Corespondent Lenders (underwrite their own loans but get their money through a Direct Lender) or Mortgage Brokers (Offer a variety of loans available through Direct and Corespondent lenders). Of note, Retail banks and Mortgage Bankers often also broker loans through wholesale channels.

While these 3 all offer the same commodity, a loan sold to Fannie, Freddie or one of the Government backed programs, they all treat the process differently. They are have their strengths and weaknesses. Some have lower rates or lower closing costs. Some offer more personal service or no service. They might have a nice building that you can walk in to, or you might have to complete the entire transaction without ever meeting in person. Generally, these choices are good, and just a reflection of the individual business model. However, they also can lead to problems if you make the wrong choice. The best rate/closing cost could turn into something entirely different once you close.

More importantly, UNTIL A LOAN IS CLOSED, A MORTGAGE TRANSACTION IS A DYNAMIC AND FLUID TRANSACTION. It is subject to many forces outside or your control, and of the control of any of the 3 channels.

Mortgage rates - Fluctuate daily and recently have had dramatic changes on a daily basis. While the rates that you see quoted via different lenders can be different, they are still reacting to market forces outside of their control. Recently, we have seen rates change 2-4 times a day. This means that yesterday's rate sheet is worthless.
Credit Approval -The ability to get your loan financed at the rate quoted is still subject to your credit approval. This includes your credit score, information on your credit report, the verification of your income and assets and a myriad of other things that could crop up depending on the complexity of your life. i.e. BK, divorce, self employment, job changes... Unanswered questions can lead to a loan denial or at best, delays in getting your loan funded or a higher interest rate.
Home Value -Your home also needs to meet the qualifications of the individual investor, be it Fannie, Freddie or the government programs. There could be property issues, or your home might not be worth as much as you or an individual lender thought. The lender who says "No Problem" might not be aware of local "problems". Your property might be in a marginal flood zone that can be overlooked, or their might be HOA litigation that needs to be resolved.
Third Party Participants - There are many additional parties involved in a mortgage transaction that can help or hinder a loan. These include Title, Notaries, Inspectors, Appraisers, former landlords, employers, Creditors, Banks... While these are normal steps that we all have to deal with, they are participants behind the scene that most borrowers are unaware of. Also, they all need to be paid, which lead to those high loan costs that everyone likes to complain about.
Government Intervention - We are seeing regular changes that affect your ability to get a loan. Some are in your best interest, others are misguided attempts to protect you. Regardless, they have a tendency to cost you money and extend the time it takes to close. Some have hindered your ability to get a loan period, or limited the choices available to you.

While this list isn't all inclusive, I believe it helps paint a picture of a process that can be more complicated and involved then you might be aware.

Conclusion

If we had a simple process where rates were the same no matter where you went, approval was based on a simple credit score pull like getting credit at Best Buy, and the lender used the County Tax records to dictate home values on a refinance and a purchase agreement on a purchase, then maybe I would agree that a mortgage is a commodity. You could then get your home loan at Wall Mart. But that is not the world we currently live in. I also believe that rates would be higher and fewer people would own homes.

So, in answer to my origional question "Is a mortgage a commodity?" My answer would be YES and NO.

Once it is completed yes, it definitely is a commodity. While you are in the process of looking for a lender and getting the loan done, it is anything but a commodity.

My Advice

Spend your time looking for a lender who you feel comfortable with. Discuss how rates will be calculated and how compensation will be structured. Get this in writing. Learn about his/her process for getting the loan funded and what to expect. Ask for referrals and contact them. Not just from clients, but also from Realtors, Appraisers, Title companies.

Once you find this person, stop looking for the "Best Deal". Commit to them and trust that you have made a good decision.

Larry Morris is a Certified Mortgage Planning Specialist with American Nationwide Mortgage Company in Newberg, Oregon. He specializes in USDA Guaranteed Rural Home Loans, FHA Purchase and Refinance, FHA 203k Rehab loans, Sect 184 Native American loans, Hobby Farm loans and conforming purchase and refinances in the states of Oregon and Washington.

He can be reached at 503-421-0096, or larry@PDX-Mortgage.com.

www.PDX-Mortgage.com

OR License ML-3259
WA License WA-510-LO-51175

APR rates are subject to change based on lender's normal credit guidelines and market conditions.

HUD

Posted by Larry Morris, Oregon Mortgages on 07/26/2009 06:17 AM

Comments (43)

Is a Mortgage a Commodity in the Mortgage / Finance Channel

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Originally posted at: Oregon Mortgage News: Is a Mortgage a Commodity?

This post has been included in Oregon Information
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43 Comments on Is a Mortgage a Commodity?

JUL

Larry, Great post! I agree that you need to find someone that your compatible with, and someone that will lay everything out. The people to stay away from are the ones that don't want to show everything to. This is a major transaction for people and one that you need someone who will make the process easy and enjoyable.

I would add only one thing.

Don't be sucked in to the published "interest rate". The Devil is often in the details, the terms and conditions.

Larry, very nice. Interesting discussion. Those providing mortgages are in the service industry, so is a mortgage a service?

Great contrast with the differences and similarities of how a mortgage is like a commodity. Hadn't seen it explained this way and thanks.

Guess I have to add this: Mortgages are commodities to the lenders but certainly not to the homeowners. To the buyer it is more likely 9-35 pages of fine print which they have never read or could not understand, but yet they signed it.

It's always dangerous when your buyer is tempted to stray away from well known lenders for the teaser rates !

Larry - excellent post. Buyers sometimes like to shop till they drop thinking there is a better deal around the corner and who knows - maybe there is. But - the most important factor is working with a lender they know, like and TRUST. Trustworthy lenders - and there are many - can get the best rates - close deals on time (well ok, right now that's not so easy) and keep the transaction seemless for eveeryone. A good lender is part of the 'team'.

Dennis - You are correct. That said, I can't tell you how many people didn't want to hear the truth. They wanted to hear how easy it would be and why they, or their property, were such a good risk.

Lenn - Good point. While a published has to be available by law, it will only be available to the few who meet the "Best Rate" requirements.

Gabe - That could be argued. Would that also mean that a Realtor is in the Service Industry? Or a Doctor or CPA? We all provide a service.

Joe - Thanks for the comment.

Mary - Good point. To us it is a transaction. To the borrower it is their home. A good Loan Officer will attend the closing to help answer questions.

Michael - I agree, however, it is often the well known lenders who have the teaser rates. That rate is a valid rate, but maybe not for that borrower's situation.

Anna - Thank you. I should have ended my post with that statement.

Great post today with intreesting analogy.

Patricia

Pick your realtor--and your lender the same way. Go with someone you TRUST rather than picking by strict rates or costs.

Patricia - Thanks for the comment.

Erica - I agree. Your Realtor and Lender should be part of your personal "Home Buying" or, I would even argue, "Home Selling" team.

Larry,

Thanks for your post. All too often, consumers think mortgage companies and Realtors are commodities because we haven't done a good job of defining what makes our service different or better.

Truth be told, often times there isn't a difference that is discernable to consumers. Those who offer a unique advantage -- and communicate it clearly and consistently -- have a leg up on the competition.

Dave

David - And that's where a good copywriter comes in...

good post - congrats on the feature!

Hi Larry - That answer - "yes and no" - is one we face in many circumstances. So many things just aren't cut and dry in the mortgage industry. Congratulations on the feature.

Amber - Thanks for the comment!!

Karen - Your post got my juices flowing, as did another post I recently commented on. A mortgage itself probably is a commodity and many in our business do nothing to change that, but the process of getting a loan has way too many varibles involved for it to truly be one.

Excellent advise. always recommend 2 or 3 options for my clients but let them know at the same time the guy I like and why. Just for that very reason. Honesty, openness and a super hard worker for you.

The banks and investment companies sure considered them commodities these last few years and look where that got us, but yes, I believe in the finished state they are commodities.

JUL

Joel - Thanks for the comment. But I would ask why you give 2-3 options. Why not just give them the name of the person you feel would be a good fit for them. Your vote of confidence would probably speak volumes. Also, there is a huge difference between coercion and recommendation.

Larry, Great well-argued post. I think I'm understanding, but let me summarize to ensure I am (please correct me if I wrong).

1. In finding a loan to purchase or refinance a home, the consumer is NOT purchasing a commodity because the terms of the agreement can vary based on each company's procedures, rules, etc. (therefore one loan is not the same as the next).

2. When the lender sells the right to collect the loan payments ("sells the paper"), the loan is now a commodity since the terms are definite (and it can be determined that one loan is the same as the next, similar to a corporate bond).

Is this a correct interpretation of your post?

Joseph - Thanks for the comment. You are close in your summarization.

My premise is that a loan is not a commodity before it has been funded not only because there are differences between company's,lenders guidelines and market forces, but also because there are differences between borrowers and properties. All of these combined create what can often be a unique, and sometimes complicated, process. I would say that no two transactions are exactly alike, although many can be extremely similar. Even in a new development with identical homes, the borrowers can be drastically different, AND the terms of the purchase agreement can be different.

Your 2nd summarization is good. Once funded, loans are pooled together and sold on the secondary market as Mortgage Backed Securities, which later determines the rates we pay for new loans.

This is a very well structured post and takes the reader through a very logical thought process. I really enjoyed reading it and appreciated the way you contrasted and compared the process of getting a home loan. I also appreciated the definitions of correspondent lender, etc. Well done and very deserving of the feature. Congrats!

Christine - Thanks for your comment. It is appreciated.

Price is only an issue in the absence of value.

Great post. It kind of hit home because it seems I'm really getting shopped lately, which hadn't been the case earlier this year. With interest rates moving around so much, there are times that I know another lender is playing the market and hoping for a rate rebound before the close of escrow. In those situations I will have the borrower request something in writing regarding the ratelock.

Jon - good point. And, value is in the eye of the beholder. Unfortunately, many borrowers do not percieve any value in a higher price until they have a problem. Many Loan Officers do nothing to differentiate themselves from the rest.

Tim - I am as well. A lot of borrowers are still hoping for that 4.5% that they missed out on several months ago. We had 3-4 months of stability in the sub 5% range and now 5.25% is felt to be gouging... Amazing times...

Yes! Shop around and work with someone you're comfortable with

Your conclusion that a mortgage isn't and shouldn't be compared to a commodity is accurate. However, like other commodities such as apples or petroleum, the value is determined by it's composition, isn't it?

You wouldn't put diesel fuel in your gasoline vehicle or put regular grade gasoline in a high compression engine vehicle, so it is absolutely critical that any commodity anyone buys fulfills its purpose.

That's why professionals are employed. Based upon the consumers goals and objectives, they can offer the best strategies and solutions to secure the loan. Too many times, order takers treat consumers without regard to their circumstances and yet consider themselves as profesionals.

I don't believe most professionals who subscribe to Active Rain or similar venues are in the order taking business, but there are many order takers still in the industry and use price as the only measurement to secure a loan. So when professionals can't illustrate their value, as Jon #23 stated, the only issue left to condider is price, isn't it?

I could not have said it better, Larry. As a 30+ year veteran of mortgage lending (and nearly a neighbor of yours!) this is one of the frustrating areas in my job. It is sometimes a challenge to educate the consumer that lenders and loan officers are more than the "lowest rate." They often get the "lesson" the hard way and it is that experience that can taint our industry as a whole. Thanks to professionals like you, we can keep the bar raised high. Fortunately, this past year has weeded out a great many loan officers/lenders that could not perform - or tried to perform strictly to their own benefit.

Good job and thanks for the post.

Todd and Devona - Thanks for the comment. But I would add to shop around before you decide to purchase or refinance and then stick with your decision. We do not have binding agreements like many in the Real Estate community. I've had borrowers shop me when we were ready to order documents.

Mystery man or woman #28 - I agree. A big problem though is the big companies that bombard us daily with the message that a mortgage is a commodity and low price and rate are all that matter. Said long enough and ofetn enough, it becomes a perceived truth. Look how successful Geico and Progressive is with their commercials. I also agree with your assessment of AR members. I also agree with your last statment. IF a profesional, in any industry, cannot illustrate their value, all that is left to consider is price.

Thanks Leissa. I would consider Portland a neighbor...

Great post - thanks!

How about a football analogy in the middle of summer?

In the NFL the actual football is a commodity. All are the same. Its the DELIVERY of that football to the endzone that is the essence of the game.

Same with a mortgage. They ARE basically commodities but its the DELIVERY to the closing that is the key.

Do you want your mortgage provider to be Joe Montana or Joe Schmoe?

I would submit you actually want him to be Larry Morris

Bill - Thanks for the football analogy in this heat..

LOL - I just saw your ending... Thanks. Right now I feel like Joe Montana in KC.

I have very strong feelings on the how the Real Estate Industry interacts with the Mortgage Industry. I feel that many REALTORS try to justify their commission by beating everyone else out of their commission or fee. I have never, NEVER asked a service provider (mortgage, home inspector, exterminator, surveyor, closing agent, etc.) to reduce their fee as long as it was generally in line with everyone else. I don't expect any of those service providers to negotiate my fee so why would I negotiate their fee? I think that every lender deserves to make a fair living. As long as the lender doesn't try to make their ENTIRE living off of my client I have no issue with the lender making a fair profit from my client. In return for me allowing my lender to make a fair profit I expect my lender to treat my clients fairly, honestly and with respect. I expect my lender to give truthful good faith estimates (including everything that will be on the HUD). I expect my lender to answer my phone calls and questions in a timely manner. Guess what? My lender answers my calls, works diligently with my clients....and we both get referrals from satisfied clients.

Mortgage lenders and REALTORS are not supposed to be adversarial........so why make it so. I definitely do not think that a mortgage is a commodity and anyone who thinks it is might want to reevaluate thier thinking.

Great Post!! Simply put, the money is a commodity, and how you get it is a service. Love the post!

JUL

Damon - I appreciate your comments. I have had a few Realtors nit pick my GFE in the guise of protecting their client, yet they usually go home with a larger commission. You set reasonable expectations for the lenders you work with and I'm sure that he/she does as well with you. I also have had more than a few Realtors surprise me during the last week with addendums that should have been sent weeks earlier. A good lender is worth his/her gold to a Realtor in today's market.

Joe - Nice summary

Larry - I could not agree more, I have been in this industry for 25 years, the last 10 as the number one lender in the country - and I don't always have the best rate, but I have the best service and best reputation and I never have to prospect for business.

The largest loan I did was 7 million, and the guy was in the line at a ride a DisneyLand and after I hung up with him, I had to call him back and I mentioned I never told him what the rate was. He said "you came highly recommended - I know you will take care of me"

I have worked for two of the largest and most reputable direct lenders in the country - and tomorrow I am quitting because I can't get a loan closed - it is taking two months on a basic bonehead purchase....going to some place where I will have my own team again, my own processor, underwriter, funder in my office with me - so know in the commodity world I have a competitive advantage that is not based on rate, just speed and efficiency.

Thanks for the clarity on the post - have a good morning!

I agree with above. Never get sucked in by an interest rate teaser, nor believe them when they promise a closing date.

Michael - Thansk for the comment and testimony. Best of wishes. There is something to be said about being in control of one's destiny...to the best of our ability in this industry.

Gene - By law, the teaser must be a real rate, but the devil is in the details. Is it a real rate for you or your clients. And we often get sucked into having to say we can do a deal when a real estate agent puts an unrealistic closing date. In this market, 30 days often is unrealistic if we don't have an acceptable appraisal and all other documentation.

Larry,

thank for the good post. I agree that mortgages and how they are secured are not commodities. I do however think interest rates are.

Mark - Thanks for the input. I'm not sure if rates are. I'd like to hear your thoughts.

JUL

I am an attorney in the Hudson Valley area of New York. Mortgages clearly are not commodities but too many borrowers treat them as such. I tell my clients you can get a car loan on the internet as an Explorer is an Explorer no matter where you buy it. The interest rate and term are what they are and you can compare these terms between lenders easily. A mortgage is another animal and cannot be treated the same. Most take my advice and deal with 1 of the many reputable lenders that have a local presence.

My worst closings are those in which my clients use the internet and deal with a person at an 800 number. I cannot believe how many of these lenders have no idea how a closing is handled in NY. I have had 3 clients recently drop these type of lenders and switch to a lender with a local representative who knows our market and will actually talk with us.

Particularly in this market you need a local presence to help the transaction through the many pitfalls. A loan officer in TX, FL or NV hiding behind an 800 number is generally of little help.

David - Thank you for your eloquent response. While NY is a very unique market, every state has it's own nuances.

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