Thursday, December 01, 2005

WalMart, Ikea, and Captain Jack's Custom Furniture

Economic data continues to come in showing that the US economy is roaring along, with virtually no hint of inflation.  This ought to be good for bonds, but it hasn’t been so far.  We’ve lost all of the little run we got in late November, to the point that we had to slap locks down on at least four of our clients before the mandatory lender reprice at about 11am.  All of our lenders did, indeed, raise their rates on the reprice deadline.  But our locks were already in.  By our calculations, our proprietary alert system saved our clients around $40,000 in interest.  Hey, it’s what we do here.

An update on the E-loan fiasco from a couple weeks ago.  Turns out that the appraisal on the house came in about $30,000 lower than the borrower estimated it would (in fairness, it wasn’t just his estimation), meaning that the loan he thought he was going to get from E-loan wasn’t going to work any more.  Were they flexible with this?  No, they were not.  So we’re going to be doing the deal here.

I really like what E-loan is trying to do, I must confess.  There is room for a great deal of competition in the marketplace, and since I am a great believer in markets, I think that the more competition there is, the better it is for practically everyone.  But E-loan is mostly about advertising, not mortgages, and they have several disadvantages when competing with, say, The Chris Jones Group Experience (or any local lender, for that matter).  

One, they will lack expertise.  E-loan brags that they do not have commission-based loan originators.  This is not something to brag about.  In my experience, the best of the best will insist on being paid based on their ability, not their position on the corporate payscale.  If I know that I’m better than the sixteen guys sitting in my cubicle farm, why would I stick around getting paid what they get paid?  Let me assure you, I wouldn’t.  And the best don’t.  They go out and form their own companies, most of them.  At the very least, they go somewhere where their expertise will be rewarded.  E-loan’s pay system sounds like a good thing, but in reality, it means that your loan officer there will be someone I would refuse to hire.

Two, they will lack flexibility in loan design.  Here’s a scenario: you want a piece of furniture that will be distinctive and unique, something nobody else is going to have that expresses something important about you.  You will get it at a) WalMart  b) Ikea or  c) Captain Jack’s Fantastic Custom-Designed Furniture.  Right.  WalMart will be the cheapest, for sure, but what you get there will be the same as what everyone gets.  You want something different, you’re out of luck.  WalMart does not have just one of anything.  Ikea is a good choice – a lot more expensive in exchange for better quality– but they also do not stock just one of anything.  If you want something that matches you and only you, you have to work with someone that knows you.

E-loan is WalMart, folks.  They have 46,000 loan officers who have a matrix on the wall, credit score on the x-axis and LTV on the y.  Match the borrower to the matrix and hey presto! a loan quote.  Yes, that’s going to make it pretty cheap.  My 9-year-old is quite capable of the same “service”.  Unlike getting a mass-produced endtable, however, this kind of quote can cost you tens of thousands in interest.  Your local bank (or large lender) is more like Ikea.  They will cost more than E-loan but you’re going to get a reasonable fit for your situation.  There will even be some things they can do that are better than what anyone else can match.  But when it comes down to it, they will not be able (on most loans) to do something just for you.  There are loans they don’t do.  There is a pricing matrix that they have to stick to.  Bottom line, they work for a large corporation and they have corporate policies they will almost always have to adhere to.

And then there’s the little guy, the boutique lender, the massively inefficient but oh, so personal solo act.  Okay, sometimes trio.  This is The Chris Jones Group Experience.  We take forever talking to you to make sure that what we’re doing with the loan fits what you need to do.  We will slap a lock down on your loan even if we can’t reach you, just because we know that if you do decide to ultimately go through with it, you’ll want the best rate possible.  We will get up at 2am to check the Nikkei Dow to make sure that rates are not going to go haywire on the open in New York.  We will do your loan for free if that’s what we have to do (and this does happen).  We invite you to come eat our food and dance, for crying out loud (Twelfth Night, January 6, 7-9pm), just because we love you.  

But the best part is that, as we saw in the E-loan example, our pricing routinely beats the socks off of the WalMarts of the industry.  Lower overhead, for one thing.  Better understanding of the market, for another.  But mostly, we’re cheaper because we can be, and because quite frankly, we hate to lose.

So our clients don’t, either.