In 2010, we conducted a survey that showed a clear preference for smaller local lenders over the big guys. Sixty-eight percent of respondents, most of whom were potential home buyers, said they would prefer to work with a local bank or credit union, as opposed to the major national banks like Bank of America and Wells Fargo.
A recent report suggests we may have even more reason to prefer David over Goliath, when shopping for a mortgage loan. Reuters recently told the story of Guaranteed Rate, a Chicago-based mortgage lender that is “winning business from banks such as Citigroup or Bank of America.”
How the Lending World Has Changed
When first-time home buyers shop for a mortgage loan, they typically think of the “big guys” — Bank of America, Wells Fargo, Citigroup, Chase and USBank. After all, we seem them everywhere. They run multimillion-dollar advertising campaigns to ensure they stay fresh in our minds. Their billboards, ATMs and branches dot the landscape. They are ubiquitous and well known. But while they enjoy plenty of mind share, they appear to be losing market share to smaller banks.
The market is changing. In the years following the mortgage and housing collapse, the nation’s biggest lenders took the biggest losses. Perhaps you remember the TARP bailout. As a result of such losses, most of the bigger banks now have stricter protocols for qualifying mortgage applicants.
Many smaller lenders, on the other hand, weathered the financial storm and came out in pretty good shape. These lenders also tend to be leaner operations with much less overhead (no multimillion-dollar ad campaigns, for example).
Stearns Lending, a mortgage company based in Santa Anna, California, is one such example. In 2012, they provided funding for approximately 49,000 loans totaling $11.8 billion. That marked an increase of 107% over the previous year.
Brian Hale, CEO of Stearns Lending, believes this is partly due to his bank’s ability to be more aggressive and competitive. “When the big guys get backed up, they have a tendency to raise their price, to slow down volume,” said Hale. “And that gives other lenders an opportunity, because the consumer thinks, ‘Why would I pay an extra $100 a month.'”
Meanwhile, data from Inside Mortgage Finance shows that market share has fallen among the five biggest mortgage lenders. In 2010, the top five lenders took nearly 66% of the market, collectively. In 2011, that percentage fell to 53.2%.
Mortgage Shopping Means Exploring Your Options
It’s tempting to go with a known brand. This is true whether you’re shopping for a microwave or a mortgage loan. You recognize the name and the logo. You’ve seen the commercials on TV. You feel comfortable about it.
But when it comes to mortgage shopping, bigger is not always better.
We have heard countless stories of borrowers who were shot down by a Wells Fargo, Bank of America or Chase, only to be approved weeks later by a smaller lender. Smaller banks can be more aggressive in their lending practices. They are often willing to waive certain fees and requirements that the larger banks adhere to rigidly.
In fact, it happened to one of our own just last year. This was the case of a well-qualified borrower being turned down by Bank of America, only to be approved by a smaller company days later. These borrowers had excellent credit, a decent down payment, and years of steady income. They also had a ten-year track record of paying their previous mortgages on time.
They had plenty of money to cover their closing costs. But they didn’t have enough extra money in the bank, or what lenders refer to as cash reserves. So the Bank of America deal fell through at the last moment.
Undaunted, they continued shopping for a mortgage and eventually found a smaller lender that was glad to give them a loan — within days of the first rejection.
There are two morals to this story:
- When mortgage shopping, borrowers should fully explore their options. This means looking at local banks, credit unions, regional lenders and, yes, even the big guys. It’s the key to finding the best deal.
- Well-qualified borrowers should not be deterred when they hear the “no” word. Try again elsewhere. Some lenders are more risk-averse than others. Some require thousands of dollars in cash reserves, while others have no such requirements. Credit scores, debt ratios, length of employment — all of these standards vary from one lender to the next.
Smaller banks can also be more aggressive with their pricing, when it comes to interest rates and fees. According to Guy Cecala, CEO of Inside Mortgage Finance: “The big banks are doing pretty well just turning on the lights and opening up the doors at their branch offices every day, so there’s no need to compete on pricing.”