When Banks Compete… You Lose

Advertising has a way of glossing over how things really work.  I am sure you have seen the television ads for Lendingtree.com.  The happy couple looking for a mortgage has four lenders fighting over who gets to give them a loan.  Honestly, the ad is quite funny, but far from the truth.

The first thing you should know is that Lendingtree does not make money off of doing mortgages.  The company makes it money from selling your personal information to mortgage providers.  The model is really quite simple.  One of the hardest things about being a mortgage lender is finding clients.  Because you are in the market to buy a home or refinance, your personal information is very valuable to mortgage lenders as a potential sale.   When you apply for a loan on Lendingtree, the company sells your information to lenders who then get to compete for your business.   On the surface, this sounds like a good thing, but there are a few flaws in the model.

The biggest flaw with the model is that the best loan officers do not participate on Lendingtree.  What do I mean?  Like most service providers, the top loan officers/bankers in the mortgage business get most of their business from referrals from previous clients and other business partners such as realtors and attorneys.  In other words, they do not have to compete for your business on Lendingtree because they get plenty of business elsewhere.  So who is competing for your business?  Generally speaking, new loan officers with very little experience or boiler room telemarketing outfits.  These are not the people you want handling the largest financial transaction of your life.

Additionally, there is very little quality control.  Many of the quotes consumers receive from these loan officers are inaccurate and outright misleading.  Often times they are just computer generated without knowing all the facts about the borrower’s situation.  During a two week period a few years ago, I participated on Lendingtree to try it out and I could see the quotes consumers were receiving and I was willing to bet substantial sums of money that those loans did not close at the quoted rates.   I have also had to step in save a few deals on more than one occassion when a consumer using Lendingtree received bad advice or their loan completely blew up at the last minute.  The system encourages bait and switch tactics because many of the participants understand that most consumers do not know how to look beyond the interest rate.  There is no incentive to offer real rates because real rates won’t get your attention.

Finally, it is more expensive than simply going with your local mortgage broker or banker.  Lendingtree charges an arm and a leg for your information.  It cost almost $20,000 just to set up an account.   Also, every lead that is received whether to loan closes or not costs about $10.00.   In addition, if your loan were to close, the bank has to pay a “funding fee” to Lendingtree of several hundred dollars.   Who do you think winds up paying these additional costs?  You the consumer. Given that mortgage business is already very efficient and competitive, it is highly unlikely a Lendingtree quote taking these additional costs into account will be any better than your reputable, local mortgage broker who simply does not have these costs to contend with.   If you are going to use Lendingtree, you are better off just opening a phone book and randomly picking four mortgage brokers.

Choose your lender carefully and don’t rely on slick marketing hype. Find an experienced referral based mortgage broker to service your home financing needs.  Buying hotel rooms online is one thing, getting the right financial advice and service is another.