Is This Mortgage Price Guarantee on the Level?
May 6, 2002
"Indy Mac guarantees that if they can’t beat the price quoted by a competing lender by at least $300, they will pay you $300…Is this on the level?"
After looking at their guarantee, I have no doubt that it is on the level.
To qualify for their guarantee, you must fax them the Good Faith Estimate (GFE) and the Truth in Lending Disclosure Statement (TIL) that you received from the other lender within 24 hours. Those statements together show the three components of price: interest rate; points, an upfront charge expressed as a percent of the loan; and other lender fees expressed in dollars. Then Indy Mac will tell you whether or not they can beat the price by $300. If they can’t beat the price, you collect the $300 later when you show that the competing lender closed your loan at the terms quoted earlier in the GFE and the TIL.
To understand the guarantee, keep in mind that price quotes shown on the GFE and TIL are just quotes – they are not final until locked, which usually requires submission of an application. Also bear in mind that lenders reset prices every day and sometimes during the day.
Let’s assume you have a quote by a lender on Monday, you deliver it to Indy Mac on Tuesday, and on Friday the terms are locked with one of them. We have to consider what happens in the market between Monday and Tuesday, and then between Tuesday and Friday.
Lets suppose that the market has not changed between Monday and Tuesday. In that event, Indy Mac will in all probability find it profitable to better your deal by $300. The reason is that the other lender is saving Indy Mac money by (unwittingly) doing work on its behalf, including the costly task of finding you as a customer. Usually that is worth a lot more than $300.
If prices fall between Monday and Tuesday, Indy Mac does even better. They can beat the competitor’s price by $300 plus the price drop, or they can stay with the $300 and keep the price change for themselves.
If prices increase between Monday and Tuesday, or if the competing lender was low-balling you with a quote below the market, Indy Mac will be unable to beat the quote. What happens then depends on how the market changes between Tuesday and Friday. If prices are stable or if they increase, you will not be able to lock with the other lender at the terms originally quoted. In that case, Indy Mac will not be on the hook for the $300 guarantee.
As far as I can see, the only situation under which Indy Mac has to pay on its $300 guarantee is one where the market price drops after it has refused to meet a competitor’s quote. I would guess that Indy Mac closes 10 loans that come in through the guarantee channel for every rejected one that costs it $300.
Nevertheless, among all the guarantees floating around the market today, Indy Mac’s is one of the better ones because you can collect after closing with another lender. I recently looked at another "guarantee" where you must provide the GFE and TIL from another lender on the day you lock with the lender offering the guarantee. If the other lender’s quote is lower, you collect $250, but only if you close with the lender offering the guarantee!
A guarantee on which you collect only if you accept the higher price of the guarantor is worth very little. Lenders offering such guarantees are betting that shoppers will react positively to the word "guarantee", and won’t bother reading what it means.
"Indy Mac guarantees that if they can’t beat the price quoted by a competing lender by at least $300, they will pay you $300…Is this on the level?"
After looking at their guarantee, I have no doubt that it is on the level.
To qualify for their guarantee, you must fax them the Good Faith Estimate (GFE) and the Truth in Lending Disclosure Statement (TIL) that you received from the other lender within 24 hours. Those statements together show the three components of price: interest rate; points, an upfront charge expressed as a percent of the loan; and other lender fees expressed in dollars. Then Indy Mac will tell you whether or not they can beat the price by $300. If they can’t beat the price, you collect the $300 later when you show that the competing lender closed your loan at the terms quoted earlier in the GFE and the TIL.
To understand the guarantee, keep in mind that price quotes shown on the GFE and TIL are just quotes – they are not final until locked, which usually requires submission of an application. Also bear in mind that lenders reset prices every day and sometimes during the day.
Let’s assume you have a quote by a lender on Monday, you deliver it to Indy Mac on Tuesday, and on Friday the terms are locked with one of them. We have to consider what happens in the market between Monday and Tuesday, and then between Tuesday and Friday.
Lets suppose that the market has not changed between Monday and Tuesday. In that event, Indy Mac will in all probability find it profitable to better your deal by $300. The reason is that the other lender is saving Indy Mac money by (unwittingly) doing work on its behalf, including the costly task of finding you as a customer. Usually that is worth a lot more than $300.
If prices fall between Monday and Tuesday, Indy Mac does even better. They can beat the competitor’s price by $300 plus the price drop, or they can stay with the $300 and keep the price change for themselves.
If prices increase between Monday and Tuesday, or if the competing lender was low-balling you with a quote below the market, Indy Mac will be unable to beat the quote. What happens then depends on how the market changes between Tuesday and Friday. If prices are stable or if they increase, you will not be able to lock with the other lender at the terms originally quoted. In that case, Indy Mac will not be on the hook for the $300 guarantee.
As far as I can see, the only situation under which Indy Mac has to pay on its $300 guarantee is one where the market price drops after it has refused to meet a competitor’s quote. I would guess that Indy Mac closes 10 loans that come in through the guarantee channel for every rejected one that costs it $300.
Nevertheless, among all the guarantees floating around the market today, Indy Mac’s is one of the better ones because you can collect after closing with another lender. I recently looked at another "guarantee" where you must provide the GFE and TIL from another lender on the day you lock with the lender offering the guarantee. If the other lender’s quote is lower, you collect $250, but only if you close with the lender offering the guarantee!
A guarantee on which you collect only if you accept the higher price of the guarantor is worth very little. Lenders offering such guarantees are betting that shoppers will react positively to the word "guarantee", and won’t bother reading what it means.