Zillow Mortgage's major flaws

Zillow, the popular real estate site, now has a complementary mortgage site. It is also complimentary (with an "i") because neither participating lenders nor borrowers pay for the service.

Prospective borrowers fill out a long questionnaire, similar to a mortgage application, except that the borrower's identity is not disclosed. The questionnaire is made available to all participating loan providers (LPs), who are defined as individual loan officers or brokers rather than firms. Any LP may submit price quotes along with information about themselves. Borrowers also have access to ratings other borrowers have given the LPs. The borrower's identity is revealed only when he contacts an LP, and only to that LP.

The anonymity of the process allowed me to kick the tires by submitting a loan request. I received quotes from six loan providers on my fictitious house purchase in Valley Forge, Pa.

This site has some features I really like. One is placing the initiative to select an LP in the borrower's hands. This is in sharp contrast to the modus operandi of lead-generation sites such as LendingTree or LowerMyBills, where three or four firms selected by the site pay for the right to contact the borrower.

Identifying LPs as individuals rather than firms is also a good idea. Realtors who refer home buyers to LPs have always used this approach because even the best firms may harbor incompetents or rogues.

Zillow has also done a good job in designing a uniform format that all LPs must use to quote prices. All quotes are comparable and are shown on one screen. Each quote shows the type of loan, interest rate, APR, total lender fees and monthly payment. The user can click on the quote of any one LP and get more detail, including critically important details about adjustable-rate mortgages.

Shopping anonymously should appeal to borrowers because it means that they can control the process, select who they want to deal with, and not be harassed by others. But anonymity comes at a price. No LP is going to invest any significant amount of time on anonymous borrowers, so they come up with a quick quote, include a prepackaged testimonial about how good they are and how much they would enjoy working with you, and leave it at that. They don't even bother keeping their quotes up to date.

For example, I signed on over the Memorial Day weekend. On Tuesday, I received quotes from six LPs. I didn't get to check until Thursday, however, and over those two days, market rates had jumped almost 0.25 percent. None of the six LPs had bothered to update their quotes. Maybe if rates had gone down instead of up, they would have, I don't know.

The major weakness of Zillow Mortgage from a borrower's perspective is that the price quotes don't necessarily mean anything, so using them as the basis for selecting an LP is hazardous. Further, Zillow is very unhelpful in indicating what the price quotes do and don't mean.

At best, a quoted price is the price the LP could deliver on the loan specified by the borrower, provided that a) the borrower can be approved for the loan, and b) given approval, the price can be locked immediately.

But the LP is guessing about approval. It is an educated guess, based on the information provided by the borrower, which is extensive. The LP can't confirm the information, however, and can't run it through an automated underwriting program because those programs require an identifiable borrower.

In a world where underwriting requirements have substantially tightened, this is a problem. It is not unique to Zillow, but I would expect Zillow to explain it to borrowers, and they don't.

The second assumption underlying a price quote is that the loan can be locked immediately, which of course it can't -- the borrower has to apply and be approved first. This means the LP can't be held to a quote, which creates a temptation to lowball the price in order to be the LP the borrower contacts.

Zillow does have some things to say to LPs about this issue. First, they warn LPs not to lowball because it will be reflected in poor ratings, which will hurt the LP in the long run. That's fine.

Unfortunately, Zillow also tell LPs "… we expect you to stand by your quote if the information provided by the borrower is accurate." That says that price quotes are locks, which is ridiculous. No LP can afford to lock a price quote in a volatile market with no commitment from the borrower. This is an impossible standard, and can only confuse borrowers.

Zillow should explain to borrowers the assumptions underlying price quotes, and impose a requirement on LPs that makes sense. I would have them quote prices for a minimum of three days, which would be highly educational for borrowers. Zillow can also suggest to borrowers that when they contact an LP, they ask the LP to keep quotes current until the price is locked.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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