A marketplace of choices.

Author:Guttentag, Jack
Position:Computer systems provide information on products and market niches of mortgage lenders

Computer systems that list lenders' products side by side don't promote cutthroat competition just on price. Instead, these systems promote competition in a wide variety of product niches.

You've heard it often. "Delivering loans by computer, where consumers can compare prices side by side on the screen, results in commoditization. Consumers select the best price, and everything else - including service - goes out the window."

To appreciate why this is a myth, consider the data in Figure 1. It is a table that lists actual price quotations from April 24, 1996, covering 30-year conventional fixed-rate mortgages (FRMs) posted by 13 lenders (denoted A through M). These lenders had their products listed on the MARS System. (MARS is a computerized loan origination system offering loan price quotes and terms for multiple lenders.)

Figure 1 is limited to 30-year FRMs, which are viewed as the most commoditized of all home loan types. For each of the market niches shown on the table, I found the lender or lenders offering the best deal. I defined the best deal as the smallest number of points for a given rate or the lowest rate for a given number of points.

Of the 13 lenders covered, 12 are represented on the table, meaning that each of the 12 offered the best deal in at least one significant market niche.

What Figure 1 illustrates is something I call nichification - the modification of prices and underwriting requirements for an extraordinarily large number of combinations of transaction, borrower and property characteristics. Nichification is in some sense the opposite of commoditization. Commoditization implies something akin to the economist's concept of perfect competition, where large numbers of sellers generate a single price from which none can diverge. The notion of nichification implies substantial pricing discretion, because the number of competitors within any niche is much smaller, and borrowers have great difficulty making price comparisons within niches.

Until now, information about market niches has been scant. Only product niches have received any attention, but even here the available information is quite incomplete. However, a number of major lenders now deliver their product information to the point of sale using the MARS System, which allows them to define product, pricing and underwriting niches in virtually any degree of detail. This information, which is generally updated daily, is stored in a central data base (the MARS Clearinghouse) and is a potential treasure trove of information on the structure and competitive characteristics of the home loan market.

While the lenders providing this information do not constitute a representative sample of the market - large lenders are disproportionately represented - the market segment they represent is important in its own right and growing. As of April 30, 1996, there were 25 lenders represented on the system that originated about $80 billion in loans in 1995.

FIGURE 1 Lenders Offering the Best Deal on a 30-Year A-Quality Conventional FRM in Selected Market Niches, April 24, 1996 Rate Amount LTV Lock Special Lowest Lenders in Features Points Niche(1) 7.5% $150,000 80% Float L 5 8 150,000 80 Float J/E 12 9 150,000 80 Float H 5 7.5 150,000 80 60-day L 5 8 150,000 80 60-day E/K/L 10 9 150,000 80 60-day D/I 3 8 150,000 80 90-day K 2 8 30,000 75 Float E 10 8 350,000 75 Float B 5 8 600,000 75 Float B 5 8 350,000 95 Float F 2 8 150,000 80 Float Investor G 2 8 350,000 80 Float Investor J(2) 2 8 150,000 80 60-day Investor A 1 8 150,000 80 Float Inv/Condo G 2 8 350,000 75 Float Refi/Cash D/M 5 8 600,000 75 Float Refi/Cash K 2 Lowest Points Rate -2 150,000 80 Float J 3 -2 150,000 80 60-day I 3 Total Lenders in Group: 13 1 Includes those within .125% of the indicated rate or 1/2 point of the indicated points. 2 Only available at 9.5%. Source: GHR Systems Inc. FIGURE 2 Dispersion of Lock Pricing Conventions by 19 Lenders on a 30-Year A-Quality Conventional FRM, April 24, 1996 Range of Price Increments Between Lock Periods Lock Period Increase Price Range Lenders(1) 15 to 30 days .125 to .250 5 30 to 45 .075 to .125 7 30 to 60 .125 to .250 9 15 to 60 .250 to .375 4 30 to 90 .250 to .625 3 Length of "Free Lock" Period Days Lenders 0 1 10 2 15 5 30 3 45 4 60 3 75 1 1 The total exceeds 19 because some Fenders appear on more than one line. Source: GHR Systems Inc. This article is a first report on market niches using the MARS data base. It barely scratches the surface of what is there, but it illustrates the potential application of this information and hopefully paves the way for more definitive analyzes.

What is a market niche?

The prevailing view of niches is that they are departures from a standard set of specifications. Loans that are consistent with the standard specifications constitute the...

To continue reading