Would you pay a fee to get a mortgage? Or would you prefer to get a really bad mortgage?

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Jeff Lazerson, a mortgage broker and faithful Time reader from Laguna Niguel, Calif., has been bugging me for a while to write about something he’s devised called Mortgage Grader. It’s software that he developed with a grant from the Ford Foundation that essentially uses the credit scoring process that dominates mortgage lending these days on behalf of the borrower instead of the lender. You pay a flat fee, you enter your financial information into Mortgage Grader, it runs your info (sans your name) by a bunch of lenders, and comes back to do with the best loan deal it can find. If the loan in fact gets funded, you pay a flat fee to Mortgage Grader. There’s no dumping subprime loans on people who could qualify for prime, no masking high-cost loans with low-low teaser rates.

I’ve been trying to figure out what I could say about this that wouldn’t sound too much like an ad, and I finally figured it out. The question is why this isn’t already the dominant model for getting mortgages. And the answer must have something to do with that up-front fee.

It’s fair to say that most people cannot be expected to puzzle out on their own whether a mortgage loan is a good deal or a bad one. This is not necessarily because they’re stupid or irrational, but because understanding amortization and the present cost of future commitments is not something the human brain really evolved to do.

That’s why most homebuyers rely on people who know more than they do to guide them to the right mortgage. The complication is that these expert guides understandably want to be paid for their expertise, which can create some perverse incentives. (This is true of the sellers of all financial products, of course.)

The least-conflicted path to financial advice is simply to pay a flat up-front fee. But for reasons that also probably have something to do with how the brain evolved, most of us hate doing doing that. So most financial advice-givers (a.k.a. brokers), live off of commissions, some paid directly by the borrower/investor/customer but many by the sellers of the financial product. This last approach can of course lead to deeply customer-unfriendly practices, which we saw in spades at the tail end of the mortgage boom in 2005 and 2006. But it can seem attractive to borrowers because there’s no visible fee.

At Mortgage Grader the fee is entirely visible. Would-be borrowers have to dig money out of their wallets to pay it. Will they?

Update: As can be seen from the corrections above, I slightly misunderstood the Mortgage Grader model: You don’t pay the fee until the mortgage is funded. Also, as far as the “bugging” goes, Lazerson would like me to point out that I asked him at one point to keep reminding me if I failed to write something. And he adds in his e-mail:

The reason “why this isn’t already the dominant model for getting
mortgages” is because I received little or no cooperation from the
lending industry early on. Many of the lenders took the position that
they had no interest in helping me to commoditize the mortgage shopping
process to the consumers’ advantage. After The Ford Foundation gave MG
the grant and I raised other funds to create the software, after Harvard
gave MG rave reviews and after the Wall Street Journal started writing
about us, did consumer advocates become aware of MG and lenders started
to take MG more seriously.

Right, but the lending industry is never going to go over to this kind of set-up voluntarily. Only consumer demand, and maybe pressure from regulators could ever make this the standard way of getting a mortgage. My post was about the difficulties inherent in getting consumers to choose this superior model for getting financial advice.

Finally, Felix Salmon and his commenters have an interesting discussion of the Mortgage Grader model here.

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