Mortgages are Becoming more Expensive

While mortgage rates are still trending lower, the cost of obtaining a mortgage has never been higher. What’s behind this contradiction? The government has implemented a handful of new initiatives, which are designed to make government mortgage programs solvent and increase overall transparency in the mortgage industry. A necessary byproduct of these efforts has been an increase the cost of obtaining a mortgage.

The first set of rule changes governs the Good Faith Estimate (GFE), which is furnished to new borrowers when they obtain a mortgage quote. In response to claims that past GFEs were wildly inaccurate and differed markedly from actual costs, the government mandated that GFEs must now adhere to certain standards, and that the difference between estimated and actual costs may have to be covered by the lender. As a result, “On average, origination and third-party fees on a 0,000 purchase mortgage added up to ,741 — a 37 percent jump over last year’s average of ,739.”

Of course, it’s less clear whether actual costs have increased, or whether GFEs have merely risen in order to become more commensurate with actual costs: “Now, it’s a more accurate portrayal. Actual closing costs have not increased. The estimates have gotten closer to the actual costs.” According to some industry insiders, however, actual costs have also risen in order to comply with the more burdensome government regulations: “Fees have risen because more people are needed to process the same number of loans. He estimates borrowers pay 0 to ,500 more than two years ago to have their mortgage application processed.” Unfortunately, while more accurate GFE’s are certainly a step in the right direction, it remains to be seen whether the enhanced (read: more expensive) processing will lead to better service and less systemic risk.

The other cost increase only reflects FHA mortgages. (Actually, I shouldn’t say “only,” since fully half of all new mortgages are insured by the FHA). Anyway, due to the rising incidence of default on its loans and shrinking reserves, the FHA is raising insurance premiums for all new borrowers. “The agency will raise annual insurance premiums to as high as 0.9% of the loan amount, up from 0.55%. For new borrowers, that would translate into an average monthly payment increase of . At the same time, it will drop the upfront premium that borrowers pay when they take out a mortgage to 1%, from 2.25%.” Borrowers that have already obtained loans will not see retroactive price increase. These changes (along with a limit on seller contributions) are expected to bring FHA loan terms closer in line with (insured) private loans, and hence to limit the financial fallout from future defaults.

The final set of fees have not yet been implemented, but I would still like to mention them because they are probably the broadest in application. Basically, any loan that requires government backing will also include an interest rate premium in return for that protection. It’s understandable that the government is keen to spin off Fannie/Freddie and to prevent the FHA from sliding further towards insolvency. In addition, with the mortgage market so dependent on the guarantee  – “nine in 10 new loans are currently backed by Fannie, Freddie or government agencies” – there’s no chance that it could continue to function, or that rates could remain low, if the government suddenly withdrew. Besides, the industry seems resigned to continued government involvement, and is willing to pay for the stability that it provides. The only question is how much.

In short, be advised that the golden era of obtaining a mortgage may have come to an end. Higher costs for borrowers notwithstanding, that might be a good thing.