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Mortgage Professor: Nov. 24, 2013

Under federal law, every home mortgage borrower must be provided with a good-faith estimate of settlement costs within three days of receipt of the borrower’s application. The good-faith estimate, or GFE, was administered for many years by the Department of Housing and Urban Development, which made substantial improvements to it in 2010. Shortly thereafter, responsibility shifted to the Consumer Financial Protection Bureau, where it now resides.

The GFE describes the loan and its major features, including the interest rate, upfront lender fees and fees of third parties, such as title insurers and appraisers. Because of its complete itemization of all costs to the borrower, mortgage shoppers often ask me whether or not the GFE can be used to shop for the best deal. The CFPB and HUD have encouraged them to think that it can be so used. In its current Q-and-A for consumers, for example, the CFPB states that the GFE “will help you compare offers.”

If this were true, the GFE would be an invaluable tool for borrowers. Unfortunately, it has never been true and it isn’t true today, even with the recent improvements.

There are two features of the home mortgage market that thwart all efforts to use the GFE as a shopping tool. The first is that lenders can’t price a loan until they have all the information about the transaction that affects the price. Part of this information they get from the borrower’s application, and part they get from other sources, including credit bureaus, employers, banks and appraisal companies.

Because lenders need extensive information to price loans accurately, the GFE can’t be required until after the borrower submits the application. This forces the borrower looking to shop GFEs to submit multiple applications, which is a cumbersome and time-consuming chore, and it imposes heavy costs on lenders, who do all they can to discourage it. While determined borrowers can still do it, they can’t do it successfully because of the second major feature of the market: price volatility.

All mortgage lenders reset their prices every morning, and sometimes during the day. The only price to which a lender can be held is its current price, which will lapse at the end of the day. Further, the price is binding on the lender only when it is locked, which the lender will do only when it is satisfied with the information it has compiled on the borrower and the transaction.

The GFE in use before 2010 did not require lenders to date the price shown on the GFE, so it was useless for shopping. The GFE in use today requires lenders to stipulate how long the price on the GFE is good for, and every lender answers this in the same way: They indicate that the price is good only until the end of the day the GFE is issued. They can hardly do otherwise, because they will be resetting all prices the following morning. But this means that unless the GFE is delivered to the shopper the day it is issued, as opposed to the 1-3 days the law allows, the shopper won’t receive a live price.

It is theoretically possible for a shopper to submit applications to, say, three lenders, all of whom issue GFEs on the same day and deliver it to the shopper that day. In such case, the shopper could select the best price from among the three and lock it before the lock desk of the chosen lender closes for the day. The odds against doing this successfully, however, are daunting.

Even if the borrower submits all three applications for delivery at the same time, lenders have three days from the day they receive the application to deliver the GFE — four days including the day they receive it.

On the assumption that the likelihood of delivery time is the same for all four periods, the odds against all three GFEs coming back on the same day are 15 to 1.

Even if all three GFEs come back on the same day, furthermore, the borrower is under the gun to make a decision that day. At the close of business that day, the window closes, and to reopen it would require submission of three more applications to three different lenders.

Mortgage borrowers who want to shop for the best price available will do much better using a multi-lender website. Instead of having to send their information to each lender in a separate application, they enter it only once into the Web-based system, which uses it to price their loan with all the lenders participating in that system — perhaps five or more. The shopper sees live price quotes from multiple lenders at the same point in time.

Neither is the shopper under the gun to make a decision that day. While all the lenders participating in the Web program will reset their prices the next day, the shopper can repeat the process with very little effort. Indeed, the site may retain shoppers’ input data and update their prices automatically.

Of course, not all multi-lender websites are created equal. To see a checklist of major features of different sites, click on “Features of Multi-Lender” Sites on the home page of my site.

Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.