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I worked on a mortgage search engine start up for a couple years. Mortgages are a wonderful example of how well intentional pricing complexity can succeed. Mort

I worked on a mortgage search engine start up for a couple years. Mortgages are a wonderful example of how well intentional pricing complexity can succeed. Mortgage companies supply money - the most perfect commodity around. In order to avoid a pricing race to the bottom, the mortgage shopping process has become one of the most confusing possible. Obtaining an accurate price quote involves filling out a several page application which most people can't do accurately without the help of a broker. Pricing is a combination of interest rate and fees which can range into the tens of thousands of dollars. Fees are calculated in multiple steps and include certain closing costs which are only known weeks into the process - often when it's too late to switch mortgage brokers and still make your contractually-agreed close date. In the small surveys I've done, more than half of mortgage applicants only learned the total amount they'd be charged the day they close the mortgage. And many were surprised to learn of unanticipated charges amounting to >$1,000 above what they expected. This strategy was very successful in extracting differential payments from consumers. Prior to some recent regulatory reforms, the most successful 5% of mortgage shoppers negotiated fees of $6,000 on a $200k mortgage. The least successful 5% were charged fees of $18,000. These are borrowers with equivalent financial circumstances and credit rating. Much of this is due to the complexity of mortgages. So I'm dubious that this sort of apocalypse will prove true for all types of products. But I do expect to see it increasingly in categories where there is high product complexity, the product isn't easily compared based on technical specifications, brand reputation isn't important, and/or there is little value in cultivating customer loyalty (for example, I may purchase a couch once every 15 years).

nradov 15y ago
I think that has already come to an end, at least for simple residential mortgages. When I refinanced my home mortgage a few months ago I just filled out a short form on Zillow.com and it gave me instant price quotes. Then I picked the cheapest one, filled out a longer form, and closed a few weeks later with total fees of about ~$600. With the tools and information available now only a fool would get stuck with $6000 on fees (unless they're intentionally paying points to knock down the interest rate).
- spanktheuser 15y ago
  I hate to say this, but you likely paid a higher origination fee than $600. It just wasn't due at close - instead it was baked into your mortgage payment every month in the form of a slightly higher interest rate. At the end of the day, brokers and bank branches want to earn a few thousand for "originating a mortgage." This is fancy way of saying retailing a mortgage. Although they often take less - maybe $900 - for a refinance. You can find out how much you were charged by looking through your mortgage paperwork. The bulk of the mortgage broker or bank branch retail mark up comes from something that is usually labeled "origination fee." That said, thanks to recent reforms, an individual brokerage can no longer charge two borrowers will different commissions for the same mortgage. However, two different brokers can each charge very different fees. Quicken Loans, one of the largest mortgage originators out there, is notorious for charging much higher commissions than nearly anyone else. And thanks to the difficulty of comparison shopping, they're still successful in obtaining premium prices... even in the age of Zillow and Google.
  - nradov 15y ago
    No, I know all about origination fees. My interest rate was rock bottom, the absolute best available on a refinance of that type at the time. And based on what I've seen, comparison shopping is no longer difficult at all. If suckers are voluntarily paying higher prices then it isn't because of difficulty.
    - spanktheuser 15y ago
      What's easy for you may be quite difficult for others. I'm not sure the Hacker News community should ever be considered the middle of the bell curve. To wit: prior to the financial crisis, one of the largest mortgage search engines conducted a large randomized survey of home owners. A little under 40% did not know if they had a fixed or adjustable rate mortgage.
sethg 15y ago
When the Obama Administration put forth a package of proposed financial reforms a few years back, one of their suggestions was that every mortgage lender would be required to make its most prominent offering a “plain vanilla” mortgage that amortized in 30 years and had a simple fee structure. Needless to say, this requirement did not make it into the final law.
- spanktheuser 15y ago
  Sadly, the mortgage industry has reached an equilibrium such that some level of consumer abuse is, practically speaking, necessary to compete. No one has successfully disrupted this market, because it requires simultaneous technical, product and policy change on the part of brokers, federally-guaranteed agencies like Fannie/Freddie/HUD, lenders, mortgage insurers and title companies. Not impossible, but as my start-up learned, incredibly capital intensive. I always point to this as an example of how something reasonably close to a large, lightly-regulated market can still produce inefficient and negative outcomes for our society.

nradov 15y ago

I think that has already come to an end, at least for simple residential mortgages. When I refinanced my home mortgage a few months ago I just filled out a short form on Zillow.com and it gave me instant price quotes. Then I picked the cheapest one, filled out a longer form, and closed a few weeks later with total fees of about ~$600. With the tools and information available now only a fool would get stuck with $6000 on fees (unless they're intentionally paying points to knock down the interest rate).

spanktheuser 15y ago
I hate to say this, but you likely paid a higher origination fee than $600. It just wasn't due at close - instead it was baked into your mortgage payment every month in the form of a slightly higher interest rate. At the end of the day, brokers and bank branches want to earn a few thousand for "originating a mortgage." This is fancy way of saying retailing a mortgage. Although they often take less - maybe $900 - for a refinance. You can find out how much you were charged by looking through your mortgage paperwork. The bulk of the mortgage broker or bank branch retail mark up comes from something that is usually labeled "origination fee." That said, thanks to recent reforms, an individual brokerage can no longer charge two borrowers will different commissions for the same mortgage. However, two different brokers can each charge very different fees. Quicken Loans, one of the largest mortgage originators out there, is notorious for charging much higher commissions than nearly anyone else. And thanks to the difficulty of comparison shopping, they're still successful in obtaining premium prices... even in the age of Zillow and Google.
- nradov 15y ago
  No, I know all about origination fees. My interest rate was rock bottom, the absolute best available on a refinance of that type at the time. And based on what I've seen, comparison shopping is no longer difficult at all. If suckers are voluntarily paying higher prices then it isn't because of difficulty.
  - spanktheuser 15y ago
    What's easy for you may be quite difficult for others. I'm not sure the Hacker News community should ever be considered the middle of the bell curve. To wit: prior to the financial crisis, one of the largest mortgage search engines conducted a large randomized survey of home owners. A little under 40% did not know if they had a fixed or adjustable rate mortgage.

sethg 15y ago

When the Obama Administration put forth a package of proposed financial reforms a few years back, one of their suggestions was that every mortgage lender would be required to make its most prominent offering a “plain vanilla” mortgage that amortized in 30 years and had a simple fee structure. Needless to say, this requirement did not make it into the final law.

spanktheuser 15y ago
Sadly, the mortgage industry has reached an equilibrium such that some level of consumer abuse is, practically speaking, necessary to compete. No one has successfully disrupted this market, because it requires simultaneous technical, product and policy change on the part of brokers, federally-guaranteed agencies like Fannie/Freddie/HUD, lenders, mortgage insurers and title companies. Not impossible, but as my start-up learned, incredibly capital intensive. I always point to this as an example of how something reasonably close to a large, lightly-regulated market can still produce inefficient and negative outcomes for our society.