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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.
Copyright Jack Guttentag 2002
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