The Biden administration is expanding its crackdown on junk fees, this time targeting the mortgage industry.
The Consumer Financial Protection Bureau (CFPB) is particularly concerned about the rising cost of home purchase loans, which jumped nearly 22% from 2021 to 2022. That means closing costs rose nearly $1,000 to an average of $5,954, the largest annual increase ever. Until 2018.
At the same time, refinance closing costs jumped 49% to an average of $4,979. Closing costs have been found to have a significant impact on low-income borrowers as well as first-time homebuyers, with nearly 15% of them paying closing costs that exceed their down payment. This was revealed by the CFPB.
Closing costs normally include an origination fee, an appraisal fee, a credit report fee, title insurance, discount points, and other fees.
“When companies in the mortgage industry are able to inflate profits with illegal junk fees, costs for homeowners increase,” the agency said. “The CFPB is working to combat the prevalence of junk fees in the consumer lending market and ensure that mortgage companies do not charge illegal fees.”
The numbers confirm what we know to be true. This means that mortgage fees and costs have increased significantly in recent years.
Much of the increase was due to rising house prices and mortgage rates, but there were concerns that some of the increase could be driven by misleading junk fees. Specifically, consumer watchdog groups singled out discount points and title insurance as potentially leading to unreasonable or excessive charges.
The statement drew mixed reactions from housing experts.
“We never include points in the junk fee group,” Jason Sharon, owner of Home Loans of South Carolina, told Yahoo Finance. “But in the past, I wouldn't recommend discount points for a year or so, because in many cases it's a waste of money.”
Are discount points a fee?Some experts called the proposal 'puzzling'
Over the past year, more homebuyers have been using discount points to lower their mortgage rates.
A separate analysis from Freddie Mac found that nearly 59% of mortgage buyers paid discount points last year. This is up from 31% in 2021 and 54% in 2022.
This trend was even more pronounced among mortgage refinancers, with more than 82% of cash-out refinancers and nearly 60% of non-cash-out refinancers choosing interest buydowns.
Discount points are fees paid upfront at the end of a transaction to deduct a few percentage points from your interest rate, and yes, their value is increasing. However, this is largely due to the significant rise in interest rates in recent years, which have jumped from an ultra-low 3% to a 23-year high of 7%.
But in the end, for many buyers, purchasing discount points made only a small difference. Through November, Freddie Mac revealed that purchase borrowers who paid discount points had an average interest rate of 6.61%, while those who did not pay points had an average interest rate of 6.69%.
“This result seems to suggest that, from a consumer perspective, paying for discount points may not be worth it,” Freddie Mac researchers wrote.
That being said, are discount points a junk fee, as the CFPB suggests?
According to the Mortgage Bankers Association (MBA), this is not the case because buyers knowingly pay points at closing.
“The CFPB's blog post is puzzling and challenges our understanding of how the mortgage market works and the full scope of fees,” MBA President and CEO Bob Bruksmit said in a statement. “They have shown little awareness of their own regulations governing transparency and limits on the amount they can charge.” “The fees mentioned are clearly disclosed to the borrower.”
He added, “The illogical use of the term 'junk fee' also contradicts the White House's own definition, which cited the failure to disclose the fees charged.”
Discount points are not hidden fees and need to be disclosed, but buyers need to be well-informed as to whether they are worth purchasing in the long run. Especially if the builder is promoting interest rate buybacks as a selling point to attract interest rates). Sensitive buyer.
“Discount points aren't junk fees, but they don't necessarily benefit customers,” says veteran PCS founder Jason Anderson. “The need to provide additional options to clients is not about leading or provoking them. [buying points]. Rather, you should give them some options and educate them about the risks and benefits. ”
He added: “Interest rates are a sensitive issue right now. It's interest rates that set prices for people.”
Mortgage borrowers allegedly charged 'illegal' convenience fees
The CFPB recently opened a lawsuit pending in federal court that provides further evidence of junk fees being embedded in closing costs.
In Glover & Booze v. Ocwen Loan Servicing LLC, two borrowers sued over “convenience fees” charged by their mortgage companies for online or telephone payments. According to the CFPB, Ocwen Loan Servicing on dozens of occasions charged fees ranging from $7.50 to $12, fees that borrowers did not agree to when taking out their loans.
The Fair Debt Collection Practices Act allows borrowers to charge only the fees they agreed to when taking out the loan or those that are affirmatively recognized by law.
“Okwen is wrong,” the CFPB said in its opinion for the borrowers. “The agency will continue to do everything it can under the law to prevent illegal junk fees from driving up prices in the consumer market.”
“Interest rates may rise”
If you're looking for junk fees added to your closing costs, check Section A of your loan estimate.
“I like to call it the mortgage price tag,” Sharon said. “With this section, lenders are setting fees that customers cannot shop around for, thus forcing customers to accept fees that they would not receive with other lenders. This is income for the lender.”
He further added: “The fee was zero.” [in Section A]That's how I run my company and I've seen tens of thousands of dollars there. Examples of these fees typically include points, management fees, underwriting fees, processing fees, and a variety of fees with similarly innocuous names. ”
If you want to know what fees you'll be asked to pay at closing, talk to your lender before you sign. This should be part of your considerations when choosing a financial institution.
If the CFPB seeks to lower these fees in the future, industry experts predict that some lenders may choose to recoup lost profits in other ways, primarily through higher interest rates. ing.
“If the government tries to limit these fees, lenders will be forced to raise interest rates and make more money on loans from that revenue stream,” Sharon said.
“The money has to come from somewhere,” Anderson agreed.
Gabriela Cruz Martinez I'm a personal finance and housing reporter for Yahoo Finance. Follow her on X @__Gabriela Cruz.
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