Are Mortgages Commodities?

Websters defines commodities as:

A good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors other than price.

Do most mortgages meet this criteria?  One could argue they do.

We say “most” because there are a few exceptions:

1. There are a handful of truly unique products out there that deserve a slight rate premium.
2. Mortgages with “normal” policies deserve a rate premium over mortgages with unusual restrictions (such as variable-rate mortgages that impose IRD penalties instead of just 3-months interest, or 5-year fixed terms that are completely closed for 3-5 years)

Generally, however, most mortgages of the same term are commodity-like.  That leads people to focus on the mortgage with the best rate.

To get a mortgage, though, you have to work with a human being, and that is where the commoditization ends. 

The service that mortgage professionals provide can range from minimal to outstanding.  A mortgage planner that is truly skilled is far from a commodity because there simply aren’t that many of them.

Take this example.  Suppose you come across a mortgage planner who does the following:

• Researches every available lender based on your specified mortgage criteria (even non-broker lenders)
• Presents the best rates and features he or she can find
• Helps you pick the most economical term given future rate assumptions
• Mathematically determines which mortgage has the lowest overall cost based on your 5-year and/or long-term goals 

This type of service adds value to the transaction because it can save the borrower money down the road.  Good advice is unique and it is not a commodity. 

On the other hand, mortgage “specialists” who don’t do these things are providing a service that is a commodity.  In fact, there’s a term for these people:  “order takers,” and they add very little value.

When someone adds little value in a competitive and commoditized market, they don’t deserve much business.  But, oddly enough, sometimes they get it anyway.

Has this ever happened to you?

1. You go into a bank, ask the mortgage specialist for the very best rate, and he/she punches a few buttons and quotes you something
2. You call a mortgage planner and he/she find you a better rate, provides warm and helpful advice, and spends time to help you sort out the many available options.
3. The bank rep learns about the rate that your mortgage planner quoted you and offers to match it.

In this case, who should really get the business?  The rep who didn’t disclose their best rate up front, made you search for better offers, and provided no worthwhile guidance?  It would seem not.  Yet, people sometimes choose to stick with their bank anyway…out of convenience.

If this happens to you, take a step back.  If the rates are close, consider rewarding the professional who is upfront and tries hard to ensure you make the right choice.  Mortgages may be commoditized, but mortgage planners who add above-average value are anything but.