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August 19th, 2010

Are closing costs rising? Too soon to say

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A recent report suggest that closing costs have risen substantially over the last year:

A new survey by Bankrate.com showed a startling 37 percent jump in estimated closing costs. The survey compared certain costs reported on the good-faith estimate lenders must give borrowers shortly after they apply for a loan.

[The survey concluded that] The average cost nationwide this year was $3,741, compared with $2,739 last year.

However, the increase revealed in the year-over-year comparison (2009-2010) probably isn’t comparable because of the change in the Good Faith Estimate (GFE).

Since January 1, 2010, mortgage lenders have been required to issue the new GFE in order to ensure that the actual costs of the mortgage (closing costs included)  substantially match the charges the borrower is quoted at the time of application and at the time of closing. For the first time, all lenders are required to use the same form for their disclosure.

The survey compares “estimated” closing costs, which means they didn’t survey actual closing costs, or those that were actually paid by consumers at the closing table. Before the 2010 change, and using the old GFE, a lender could advertise zero closing costs, yet wind up charging you fees at the closing table¬† (these fees fell outside of those reported in 2009’s looser set of regulations). This year, because of the new GFE, virtually all of your closing costs are presented upfront and so are more explicit; since that’s the case, it stands to reason that of course 2010’s “estimated” costs will appear substantially higher.

Doesn’t mean costs aren’t rising

All that said, it doesn’t mean that closing costs aren’t rising overall:

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, reports data from conforming loans closed each month. In its latest report, it said initial fees and charges on purchase loans were 0.8 percent of the loan balance in June, up from 0.72 in May and 0.58 percent in June of last year.

There are several reasons why closing costs could be increasing in 2010:

Reduction in volume: Stringent lending requirements have drastically reduced borrower demand for purchase money mortgages (non refinances). This reduction in volume may have caused a multitude of lenders to increase their costs and fees to make up for the drop off in business.

Costs of doing business increasing: The entire mortgage-lending landscape has changed drastically and continues to change. Lenders have more federal requirements to do business than ever before. Now there are licensing and bonding requirements as well as service protections which all serve to drive up the cost of doing business.

More Disclosure: The new GFE has prompted lenders to set out financial protections for themselves. As Brian Sullivan, a spokesman for HUD puts it, “[Lenders] can’t lowball [borrowers] on the estimate anymore“:

To make sure they don’t face a penalty, some loan companies are increasing their fees.

“If the loan agent underestimates fees, we have to eat them,” says Dick Lepre, a senior loan officer with RPM Mortgage. “Everybody raised their processing and underwriting fees to create an allowance for whatever mistakes there were up front. Ours went up by 15 percent.”

A consumer expression

With mortgage rates at historic lows, those who can qualify for financing have found that lower rates have opened up the opportunity to afford more house for their money. Consumers may be more willing to pay upfront for the lower rate which will stay with them for the life of the loan. Let’s say that on your salary you can afford a $200,000 house at a 5% interest rate. At 4.25%, you may be able to afford a $215,000 home, and paying points and fees is the only way that 4.25% rate can be obtained.

Wait and see

There has been so much change in the world of mortgage lending inside of just one year. Likewise, all these new factors and changing market conditions have made it nearly impossible to determine at this juncture if closing costs are really rising or not. Evidence suggests that this is the case, but comparing estimated 2010 closing costs with estimated 2009 closing costs is like comparing apples to oranges. We’ll have to wait until mid-to-late 2011 to get a fair year-over-year comparison…and who knows what could change from now until then.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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