Within three days after a homebuyer’s loan application is first submitted to a mortgage lender, the lender must prepare and hand the homebuyer an accurate Good Faith Estimate (GFE) of closing costs. The estimates are required by the Real Estate Settlement and Procedures Act (RESPA).
The excess profits generated for lenders during the recent mortgage boom dissipated. In response, lenders are resorting to loan fees to generate profits beyond the interest rate or yield spread premium. As a result, a 37% increase in loan closing costs occurred during the past year, according to a recent study by Bankrate.com. Analysts assert the startling increase in loan costs is due to more realistic GFE estimates and a rise in loan fees. first tuesday does not believe these are the reasons for this rise.
Lenders are now exposed to liability if closing costs stated in the GFE differ more than 10% from the costs actually incurred at closing. Lenders also cannot charge homebuyers for third-party services not actually provided by the lenders, but that does not bar them from driving up the cost they incur to pull a profit for purportedly managing the service provided (appraisal fees and credit analysis).
RESPA regulations on use of the GFE are designed primarily to eliminate increases in lender fees at the time of closing, not at the time of the estimate. The GFE is deliberately formatted to encourage borrowers to shop around and be able to readily compare several loan offers before committing to any single loan. [See first tuesday Form 204 (DRE 882)]
GFE fees and charges on purchase-assist loans currently constitute 0.8% of the loan balance — up from 0.6% last year, according to The Federal Housing Finance Agency (FHFA). This rate of change marks the highest reported rate since 1999.
The estimated closing costs nationwide for a $200,000 mortgage are $3,741 this year, up from $2,739 in 2009. Closing costs include origination, processing, underwriting, appraisal, escrow, title insurance and other fees charged by the lenders or third-parties. It does not include taxes, recording fees, homeowners’ insurance, discount points, prepaid items or a yield spread premium over par rates.
first tuesday take: First, let’s look at basic mortgage lending practice mandated for all lenders in California. Any broker or institution that makes or arranges mortgages secured by one-to-four unit residential property in California must submit two loan disclosures to homebuyers: the California Department of Real Estate (DRE) mortgage loan disclosure statement (MLDS) and the new Department of Housing and Urban Development (HUD)-GFE. [For more information regarding GFE regulations, see the January 2010 first tuesday articles, Lenders take steps to avoid HUD’s updated GFE and HUD’s new GFE]
The current increase in loan origination costs is the result of lenders adjusting their practices to get into the new (highly contentious) appraisal management company process which artificially increases the homebuyer’s cost of an appraisal, thus increasing lender profits. Lenders and title companies are sandwiching themselves into the management of these services to divert fees to themselves, in addition to the primary service they provide.
The nonchalance of the typical buyer when shopping for the largest loan of their life and the absence of their agent’s counsel leads to the buyer’s failure to consider obtaining pre-approval letters of commitment from multiple lenders and submitting loan applications to at least two competing lenders. The adversarial relationship between lenders and homebuyers requires selling agents to protect their buyers by advising them to shop around for a fixed-rate mortgage (FRM) pre-approval before selecting the two lenders with the most reasonable rates, charges and fees for submitting applications.
Lenders abhor competition and challenges to their authority, but homebuyers and their agents need to understand lenders can do little about it. The jump this year in loan origination costs is not from more accurate cost estimates or reinstated regulations. Fee setting is a case of “conscious parallelism” among the dwindling number of mortgage lenders increasing the prices of their services, as competition by community banks is being eliminated by the Federal Deposit Insurance Corporation (FDIC) through government agency funding primarily for big banks.
The purpose of the government-mandated use of the GFE cost sheet by all lenders is to allow homebuyers the ability to readily compare the actual terms offered by one lender to the terms offered by another as they shop around. Multiple loan applications are implicit in HUD regulations and DRE loan disclosure forms, if not obvious to selling agents and their homebuyers. [For more information regarding mortgage shopping, see the May 2010 first tuesday article, Shop, shop, shop until you drop and the February 2010 first tuesday Form of the month article.]
Re: “Good-faith estimates bring higher closing costs” by the San Francisco Chronicle