Good-faith estimates get real
Facing new penalties if they lowball estimates of upfront mortgage costs, lenders and brokers appear to be coming clean about how much borrowers will pay.
As a result, the so-called good-faith estimates that mortgage providers must give to prospective customers show closing costs soaring 36% this year, interest-rate tracker Bankrate.com said in a report this week.
The main reason for the increase, according to Bankrate: Lenders are giving more accurate estimates because they now must pay to cover the difference if they underestimate the costs, according to Bankrate.
In other words, the good-faith estimates are, well, being made in better faith.
Before Jan. 1, there was no penalty for giving bad estimates, so lenders battling for mortgage business had more of an incentive to give lowball quotes.
Lenders told Bankrate that actual closing costs rose modestly this year, in part because regulators and loan buyers Fannie Mae and Freddie Mac are requiring mortgage firms to do far more fact-checking than during the boom years.
Consumer advocates say the report demonstrates how lenders took advantage of lax regulation during the housing boom by often keeping borrowers in the dark about costs until they were faced with nasty surprises when their loans closed.
“Why is transparency such a challenge for them?” said Alan Fisher, executive director of the California Reinvestment Coalition.
According to Bankrate’s survey, which obtained online good-faith estimates for loans of $200,000, estimates of closing costs charged directly by lenders are up 23% from a year ago. Estimated charges for third parties such as appraisers and title insurers soared 47%.
California was among the highest-priced states in the survey.
Total closing costs on a $200,000 loan averaged $4,406 this year in Southern California, compared with a national average of $3,741. The San Francisco Bay Area was even pricier at $4,566.
The only states with higher fees than California were New York, with costs averaging $5,623, followed by Texas at $4,708 and Utah at $4,605.
Arkansas was the least expensive state, with costs averaging $3,007.
The most expensive component of closing costs was a title search and insurance to protect the lender from the possibility that title is not held held free and clear.
These title costs averaged just $1,011 in Arkansas and $1,141 in North Carolina but set Los Angeles borrowers back by an average of $2,391 and San Franciscans by $3,181, according to Bankrate.
Title insurance premiums in California can vary substantially from insurer to insurer, making shopping around worthwhile.
The increase in estimates of closing costs stems from regulations issued by the U.S. Department of Housing and Urban Development.