Mortgage Bait and Switch — Perception Versus Reality

Let’s face it, the mortgage lending industry does not have the best reputation.  Much of the dissatisfaction is centered around the idea that lenders bait and switch borrowers, or promise attractive terms upfront to win your mortgage business but then fail to deliver those terms when it comes time to close your loan.  Changing terms at the last minute when borrowers are desperate to close their loan causes serious borrower frustration and even anger.

The practice of baiting and switching draws the ire of borrowers and has attracted significant attention from government regulators.  New rules and disclosures are designed to limit how much mortgage terms can change from the beginning of the mortgage process until when your loan closes, thereby limiting bait and switch tactics.

Tips to Avoid a Bait and Switch

• Shop Lenders.  Shopping multiple lenders is one of the best ways to save money on your mortgage and helps you avoid a bait and switch.  FREEandCLEAR recommends that borrowers compare at least four lenders when you get a mortgage, including different types of lenders.  Borrowers can use our INTEREST RATES feature to compare mortgage rates and fees for lenders in your area.
• Put it In Writing.  When you shop for a mortgage, make sure that you request a written proposal from lenders.  You should request a Loan Estimate and Lender Fees Worksheet that outlines the key terms of the mortgage including interest rate and closing costs.  Having a written mortgage proposal reduces the probability of a mortgage bait and switch.
• Be Prepared.  Make sure that you know your credit score and organize your personal financial information such your bank statements, pay stubs and tax documents.  Knowing your credit score will help you avoid surprises and organizing your financial information helps speed up the mortgage process.
• Lock Your Loan.  Locking your loan protects you against an increase in mortgage rates and is one of the best tactics to combat a mortgage bait and switch.  Depending on the length of your lock period, you may be required to pay a moderately higher interest rate but locking your loan provides certainty for your mortgage terms.  Make sure that the length of your lock period is long enough to close your mortgage.
• No Big Changes.  After you apply for your mortgage, avoid making any big life changes or significant financial decisions until your mortgage closes.  For example, it is best for borrowers to avoid changing jobs or making any major purchases until after their loan closes.  These events can impact your credit score and financial profile and may provide lenders with the opportunity to change your loan terms so borrowers are almost always better off waiting before they make any big changes.

The heightened government scrutiny raises the question: how common is the mortgage bait and switch?  According to the FREEandCLEAR Mortgage Survey, the answer is not common at all.  Survey results show a combined 93% of borrowers said their mortgage rate stayed the same (70%) or decreased (23%) from when they selected their mortgage lender until when their mortgage closed, a relatively low number given the perceived prevalance of baiting and switching in the mortgage industry.  In fact, it is relatively noteworthy that almost one quarter of survey respondents experienced a decrease in their interest rate over the course of the mortgage process.

Most borrowers said their mortgage rate stayed the same or decreased from the beginning to end of the mortgage process

Survey participants were also asked how their closing costs changed from the beginning to the end of the mortgage process.  Lenders may be delivering the mortgage rate they promised but does that come at the expense of higher closing costs? The answer appears to be no.  A combined 94% of borrowers said their mortgage closing costs stayed the same (78%) or decreased (16%) from when they selected the mortgage lender until when their mortgage closed.

Most borrowers said their closing costs stayed the same or decreased from the beginning to end of the mortgage process

The FREEandCLEAR Mortgage Survey suggests that the lender bait and switch is a relatively uncommon practice and there are several factors that help explain the findings.  First, the steady interest rate environment over the past several years makes easier for lenders to deliver the mortgage rate they quoted borrowers.  It will be interesting to review this topic again in a more volatile and inflationary interest rate market.  Second, with mortgage rates being relatively low, borrowers are more inclined to feel positive about their interest rate and less susceptible to, or aware of, a bait and switch.

The other influence that we referenced above is that new regulations are intended to make it more challenging for lenders to increase interest rates and closing costs at the end of the mortgage process.  Although implementing TRID and issuing Loan Estimates and Closing Disclosures may have made the mortgage process more cumbersome, perhaps they have been effective in increasing transparency and reducing last minute changes to loan terms.

Although the FREEandCLEAR Mortgage Survey is overwhelmingly positive on the bait and switch topic, the results also show that 7% of borrowers experienced an increase in mortgage rate and 6% of borrowers experienced an increase in closing costs from when they selected their lender until their mortgage closed.  While loan terms are always bound to change for a small number of borrowers due to factors outside of lenders’ control (such as a change in credit score or unexpected appraisal report), these borrowers likely represent a small but very vocal minority that should not be ignored.

The proper implementation of government regulations along with conservative lending practices and improved communication should continue to reduce bait and switch incidents in the future.  As more borrowers get the mortgage rate and closing costs they were promised, the perception of the mortgage industry should move closer to reality, which is positive for borrowers, lenders and regulators.

We will continue to provide a detailed analysis of each survey question on our blog in the coming weeks and you can review the full results from the FREEandCLEAR Mortgage Survey to better understand how borrowers think about and experience the mortgage process.