Los Angeles Times, CA -
May 15, 2005
Absolutely, according to M. Thomas Martin of the National Mortgage Complaint Center in Seattle, who says borrowers pay $1,250 more on average in closing costs than necessary.
Martin, whose consulting firm has been reviewing loan documents for about six years on behalf of consumers and class-action attorneys, said three out of four borrowers were charged more than their loan officers had told them they would be.
"On an average day," he said, "I look at maybe 15 HUD-1s," the industry term for the government-prescribed form most lenders use to delineate the various settlement charges borrowers are required to pay. "Every time I think I've seen it all, a new trick or angle pops up. It's really discouraging."
Stephen O'Connor, vice president of government affairs at the Mortgage Bankers Assn. in Washington, said he couldn't comment until he had reviewed the settlement sheets and "looked at all the factors."
But he did say the research "underscores the need" for the mortgage reform proposals long advocated by the Department of Housing and Urban Development. "One of the reasons the White House is calling for a package of closing costs at a guaranteed price is so that consumers can shop fees as well as rates."
In his latest sample of 1,347 loans, Martin, head of the Justice & Integrity Project, which operates the complaint center, found that the typical application fee was $177. Yet some borrowers were hit for as much as $650.
Half of all borrowers also were charged a document-preparation fee, on average, $254. But in at least one instance, a borrower was charged $475. Also, one out of three borrowers was required to pay a funding fee — typically $71. But Martin found at least one who paid $275.
Lenders have always padded their bottom lines to some degree with these so-called junk fees. However, everybody who should know better — real estate agents and title representatives, in particular, but also federal and state regulators — has tended to look the other way.
But over the last few years, Martin said, the degree to which borrowers have been cheated or overcharged with "duplicative or needless" fees has grown to epidemic proportions.
Because the flood of easy-to-originate refinance loans has all but dried up, he said, many lenders have been forced to try to squeeze every dollar they can out of consumers who are seeking more labor-intensive purchase mortgages. "They're trying to make each deal more profitable, I think to keep their doors open, to be honest," Martin said.
To protect yourself, you should go over the good-faith estimate (GFE) of anticipated closing costs that your lender is required to give you under federal law within three days of applying for a mortgage.
But Martin's research has found that some borrowers don't see the document until a few days or hours before closing; others don't see it until they sit down at the settlement table. And some have told him they never saw one at all.
In a yearlong study he completed in 2004, Martin found that only one in four borrowers ever received the document.
Unfortunately, the time to unearth overcharges and make sure you don't have to pay more than the going rate, or perhaps not pay them at all, is as soon as possible after you receive your GFE. So if you don't receive one within the allotted time limit, call your lender and demand that one be sent right away.
"Don't wait until closing day" to challenge unnecessary fees, Martin advised. "That's what most people do. We all tend to put things off until the last minute. It's still not too late if you do — if you are prepared to walk away from the deal."
The problem is that most folks show up at closing with the moving van already loaded, just itching to get into their new place, so waiting until the moment of truth is, indeed, too late.
If you don't feel competent to divine what's fair and what's not, Martin's firm will do it for you.
For $35, the National Mortgage Complaint Center (www.americaswatchdog.com) will run your GFE through its system and point out if you are being overcharged and by how much.
Is it worth it? Jim Lowman of Baltimore thinks so: The center "was instrumental in helping me save over $2,000 in uncalled-for mortgage fees before I closed on my loan. The $35 was the best investment I ever made."
Martin not only looks for duplicate and excessive fees, line by line, but he also looks for terms and conditions you might not be aware of, such as prepayment penalties and undisclosed or hidden charges that the lender who is actually funding your loan might be paying the mortgage broker who originates the loan.
These behind-the-back payments are known as "yield spread premiums," and Martin said of the 1,000-plus loans he studied in his most recent survey, an incredible 97% of the borrowers had no idea the broker received extra compensation.
Here's a list of the more onerous garbage fees. "Usually, if you see more than one junk fee, there are more," he warned. The items could have any number of names, depending on your lender's terminology or state requirements, but in general you should avoid paying them:
Application fee: You already are paying a 1% to 2% origination fee, so why should you have to pay extra for someone to fill out your application? Lenders say this charge helps weed out the tire-kickers, and some apply it to the origination fee. But many take it as additional income. Average cost: $177, with a range of $155 to $650, according to Martin.
Document preparation fee: This charge is for drawing up the note, deed of trust and other legal papers. Sometimes, though, the lender does not prepare these papers — the escrow or closing agent does, and they have their own fee. Average cost: $254; range: $225 to $475.
Document-review fee: This is for going over the package when it is returned to the lender after closing. But some settlement professionals say lenders rarely look at it when they get it back. This item is not mentioned in the survey. But one agent told me that even if the lender does review the package, it "probably takes five minutes of some low-level clerk's time at most" and is "not worth the kind of money [lenders] are charging."
Funding fee: Huh? A fee to give you the money you applied for? If you see this one, said Martin, you should "immediately start worrying about what else are they getting you on." Average cost: $71; range: $50 to $275.
Processing fee: Making a mortgage is nothing more than pushing and reviewing papers, so this should be part of the origination fee, right? Average: $395; range: $250 to $1,950.
Underwriting fee: Isn't this what making a mortgage is all about? Average: $286; range: $225 to $1,100.
Discount fee: Martin said he's never reviewed a mortgage in which someone has received an actual discount. Average: $1,322; range: $254 to $6,700.
Tax service fee: This supposedly covers the cost of paying your property taxes on your behalf. But most lenders pay the taxes for all borrowers in the same jurisdiction in bulk by wire. Some lenders even levy this fee on borrowers who pay their own taxes under the justification that they must confirm the taxes are being paid to protect their investment. This fee was not covered in Martin's survey.
Warehousing fee: Normally, this is lingo for packaging a number of loans together for sale to investors. But in your case, the charge is for holding all the papers until the loan is closed, or holding the loan itself until it can be packaged together with others and sold to investors. Also not covered in Martin's survey.
Anyone who protests junk fees should do so in writing. A phone call won't do, warns M. Thomas Martin, founder of the Seattle-based Justice and Integrity Project, which operates the National Mortgage Complaint Center.
"Write a letter and ask the lender to explain the charges or rescind them, and request that the lender respond in writing too," Martin advised. "Everything should be in writing."
If you aren't satisfied, go elsewhere, even if you've already anted up $300 to $400 for an appraisal and credit report.
To protect yourself, Martin said, insist on either paying for the appraisal or credit report at closing. If you pay in advance and decide to leave, he said, demand copies.
Lew Sichelman can be contacted via e-mail at lsichelman@aol.com. Distributed by United Feature Syndicate.
If you want other stories on this topic, search the Archives at latimes.com/archives .
Copyright 2005 Los Angeles Times