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August 16, 2012

Mortgage fees up 30 percent since 2008: Government regulation to blame?

by Central Coast Lending

Since the housing bubble burst, government-led reforms have focused on thorough regulation, disclosure, transparency, and documentation to protect consumers against predatory lending practices. But here is our question – who is going to protect consumers against government over-regulation? While well-intentioned, this over-regulation burdens the loan-process with unnecessary complications that make the mortgage process more time-consuming and expensive for borrowers.

In a recent post, Rob Chrisman, founder and writer of the widely-read Mortgage News and Commentary blog, pointed readers to the change in average closing costs for home loans over the last five years. Below are his findings, with the major introduction of regulatory mechanisms.

Year: Average closing cost

  • 2008 – $2,732
  • 2009 – $2,739 (Home Valuation Code of Conduct, HVCC: effective, May 1, 2009)
  • 2010 – $3,741 (RESPA reform introduced: effective January 1, 2010)
  • 2011 – $4,070 (Loan Officer Compensation reform: effective April 1, 2011)
  • 2012 – $3,754
  • 2013 – ??? (More RESPA reforms to go into effect)

From 2009 to 2010, we saw a 37 percent increase in closing costs passed along to the borrower. Although we have seen a dip in 2012, since 2008, borrowers are paying an extra $1,000 to obtain a mortgage. How did this happen? We will look at the new regulation and conclude with an explanation about how the side-effect has been higher closing costs passed along to the borrow.


The Home Valuation Code of Conduct (HVCC) May 1, 2009

We have been over the summary of the changes in the appraisal process (HVCC code of conduct) and how this has been detrimental both to borrowers and to professionals in the lending industry. For a refresher, check it out HERE.

By focusing on the bad – possible collusion between loan officers and appraisers, the reform also crowded out the good – professional discussion between loan officers and appraisers.  The appraisal reform pushed professionals out of the business and restricted the ability of the remaining professionals to do their job.

What’s more, the HVCC was supposed to create a standard in the industry to guarantee appraiser independence which would allow appraisals to be transported from one bank to another. However, banks have created in-house Appraisal Management Companies as new profit sources. These in-house “third parties” have no incentive to accept transferred appraisals from competitors, and so borrowers often must foot the bill for multiple appraisals when a bank is unable to fund their loan.


The Real Estate Settlement Procedures Act (RESPA) reform – January 1, 2010

The RESPA reform altered the method by which lenders and mortgage brokers disclose fees to borrowers. The result changed the content of the Good Faith Estimate (GFE) and HUD-1 settlement statement. For a complete list of the changes, you can go HERE.

The old one-page GFE itemized each fee, identified which company the fee was paid to, who was responsible for paying the fee (buyer or seller), and how much each fee cost. The new GFE, implemented in 2010, is a 3-page document that groups fees into categories that are unclear and does not identify which company receives each fee. This reform also failed to require banks and mortgage bankers to disclose their compensation as a mortgage broker is required to do. The absence of the Loan Officer compensations on the GFE remains the primary “pitch” for bankers to use when competing with mortgage brokers for business, as Dennis Walton discussed HERE. The fee isn’t any less (it is often more), but just built into the price of the rate and so invisible. We believe that the original GFE format was more understandable, and the Feds should have required all Loan Officers to play by the same rules.


The Loan Officer Compensation Reform – April 1, 2011

The Federal Reserve proclaimed that this reform will “protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices.” We believe that this reform ended up increasing the cost passed along to borrowers. The press release (along with a summary of the changes) is available HERE.

Loan officers now have to “fix” a compensation level for every loan. We think that a fixed, agreed-upon price is good thing, but we don’t agree with one-size-fits-all price-fixing mentality for every loan. Loan officers across the board have set their margins higher than the pre-Loan Officer compensation reform levels to ensure that they will never making too little on a deal, and now use the excuse that “the government fixed my compensation” whenever compensation is called into question. Borrowers are no longer allowed to negotiate the fee for this service. Also, loan officers are no longer allowed to make less than the fixed percentage, and no longer allowed to credit borrowers for unexpected costs or unexpected increases to costs.

Now, there is another problem that we have seen develop. We have seen two lenders, Franklin American and SunTrust, fix their compensation prices on behalf of the brokers.  Rather than allowing brokers to determine their fixed compensation, these two lenders are fixing broker margins.  Does this make the mortgage cheaper for borrowers? Nope. Their fixed margins are over ½ point higher than we (CCL) choose to charge currently, which is already higher than pre-Loan Officer compensation reform.


RESPA reforms round 2 (2013)

The Dodd-Frank act has mandated another change in the Truth in Lending Disclosure and the HUD-1 Settlement Statement in 2013. The Consumer Financial Protection Bureau is in charge of collecting industry comment and re-design and re-write the form. With more changes in store, could 2013 see another jump in average closing costs?


Conclusion – Borrowers are the biggest loser in all of this

There is a joke that we like to tell around our office. To prove you receive Social Security benefits during the mortgage application process, you have to show your most recent award letter, the past two years 1099s, and two months of bank account statements showing the income deposited into your account… and all that is just to start. We laugh, but this joke works because it is true. The amount of paper-work and documentation necessary to get a loan has reached a staggering amount.

Since the bubble popped, banks have wanted to avoid avoid “dangerous” loans, making standards tighter than ever,  and forcing borrowers (even responsible ones) to jump through more hoops.

The result has been the perfect storm for the mortgage industry and borrowers hoping to secure a new home or refinance. The home loan process is now more arduous for both the borrower and the broker, and while the process may be “transparent” to borrowers, this doesn’t mean it is understandable or even in their best interest.

The problem with the mortgage industry was never fee related, as evidenced by the 37% lower fees before government regulation.  The regulation was needed to correct the trend of reduced documentation and loose underwriting guidelines that got us into the mess.  Most, if not all, of those problems have already been corrected, even overcorrected, and it’s time for the government to step away and allow competitive forces to dictate the acceptable price for the service of arranging a mortgage.

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