Borrowers seeking mortgage financing to purchase a home could find themselves saving $100 a month or more by shopping around, and locating cheaper lenders with which to do business. This is according to a new blog post published this week by the Consumer Financial Protection Bureau (CFPB).
By analyzing Home Mortgage Disclosure Act (HMDA) data from 2021, the CFPB determined that mortgage rates paid by consumers vary across a wide variety of lenders, including for mortgages backed by Fannie Mae and Freddie Mac, the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and jumbo loans through “price dispersion.”
“We found that price dispersion for mortgages is often around 50 basis points of the annual percentage rate,” the CFPB notes in its blog. “To put this number in context, the median loan amount in 2021 was close to $300,000 and the median interest rate was 3%. The monthly payment for such a 30-year fixed loan is $1,265. The monthly payment for a 3.5% interest rate loan on a loan of the same amount is $1,347 – a difference of $82 a month (a 6.5% higher payment).”
Interest rates since the 2021 HMDA data was gathered have obviously increased significantly, but the CFPB found that much of the price difference between lenders — and consequently, the underlying math — remains the same.
“In a higher interest-rate environment, with monthly payments being much higher overall, this $100 a month difference might matter even more as borrowers potentially are more stretched to make ends meet,” the Bureau said.
The analysis of HMDA data only took data from the 20-largest volume lenders for each of the reported market segments. While other studies have documented the price dispersion phenomenon, this is the first instance that has used new HMDA data with multiple variables necessary for this kind of analysis, according to the CFPB.
“Our results are largely consistent with previous studies, despite previous studies often using either rate sheet data and/or selected data on originations from private providers without coverage comparable to [HMDA],” CFPB said. “It is particularly notable that earlier studies considered pre-pandemic data, which does not have the same historic volume of refinance loans.”
There are a number of attributable causes of price dispersion. These include differences between lenders (some include servicing, others market their closing speed); competition in the mortgage market not always being channeled into lower prices; some lenders may engage in demand rationing through pricing changes; and lenders with “less restrictive overlays” may charge higher prices to compensate for additional risk.
Earlier this year, the CFPB issued guidance in an effort to protect mortgage borrowers from pay-to-play digital comparison shopping platforms. Agency Director Rohit Chopra reiterated the importance of shopping around for a mortgage at the time.
“Given the rise in mortgage interest rates, it is even more important for homebuyers to shop and compare loan offers,” Chopra said in February. “We are working to ensure that online platforms are not manipulating their search results in order to coerce kickbacks from lenders.”