Complex loans more costly for borrowers

Complex loan arrangements raise the cost of borrowing for home buyers. Loans made by mortgage brokers are more expensive than those originated by direct lenders. Fees for title services can vary considerably. Almost half of real estate agents charge less than 6 percent commissions.

Those are some of the findings of a study the Department of Housing and Urban Development says validate a proposal to simplify loan disclosures through changes to the Real Estate Settlement Procedures Act, or RESPA.

HUD says the changes could save consumers $8.35 billion a year, but some industry opponents say the rule changes will increase the industry's costs and restrict competition (see story). HUD is accepting public comment on the proposal until June 12 (see story).

The new study, by former HUD Chief Economist Susan Woodward, examined 7,500 FHA-backed mortgages originated between May and June of 2001.

"Complicated loan arrangements raise the total costs to home buyers and increase the variability of fees, suggesting that lenders and brokers in particular profit when transactions are complex and consumers have a harder time comparing alternatives," the study concluded. "Moreover, it appears that lenders and mortgage brokers make their most favorable offers to borrowers that they consider knowledgeable about competing alternatives."

Although the study is under fire by the National Association of Mortgage Brokers for relying on information that's seven years old, HUD says the results are valid because the period studied was one where interest rates were stable. NAMB did not respond to a request for comment from Inman News by press time.

"This report demonstrates once and for all that the process consumers endure when they buy their homes is entirely too confusing," said HUD Deputy Secretary Roy Bernardi in a press release. "Clearly, we need to open the window and allow consumers to understand the fine print and shop more effectively for the largest purchase of their lives."

Total loan charges on 30-year, fixed-rate purchase loans averaged just under $3,400 on loans with an average initial principal balance of $105,000.

The average fees for brokered loans averaged $4,000, compared with $3,150 for direct lender loans from banks, thrifts, credit unions and large mortgage banks.

After controlling for lenders' costs and risks, such as the loan amount, property value and the borrower's credit score, the study found loans made by mortgage brokers were $300 to $425 more expensive than those made by direct lenders.

African-American borrowers paid $415 more for their loans after accounting for other borrower differences, and Latino borrowers paid an additional $365, on average.

Borrowers who completed college were charged $1,100 less than borrowers with no college, and charges in the most expensive states -- Nevada, Michigan and Utah -- were $2,500 higher than in the least expensive state, Alaska.

The study found total loan costs grew when yield-spread premiums, discount points and seller contributions to closing costs are present.

"Borrowers in neighborhoods with low educational attainment receive substantially higher-cost offers, and although a significant share 'walk away' from these offers, enough accept them to be profitable to lenders and brokers," the study concluded. "Consumers need more complete and understandable information about all the costs that will be incurred at closing so that they are better able to assess the trade-offs between up-front costs and interest rates and effectively shop and compare the costs of alternative offers."

Borrowers end up with more expensive loans when the terms are more complex, the study found, noting borrowers who take out "no cost" loans offered by direct lenders pay $1,200 less for loan origination services.

"No cost" loans showed "little relation between the level of education in a borrower's neighborhood and how much the borrower is charged, and almost no relation to the borrower's race or the racial characteristics of the borrower's neighborhood," the study said.

Total fees paid for title services averaged $1,200 per loan, were highest when other closing costs were also high, and were also found to be related to education and race.

Borrowers in African-American neighborhoods paid an additional $120 for title services on average, and those in Latino census tracts paid an additional $110. Borrowers from neighborhoods where all adults had a college degree paid $200 less than those from neighborhoods where none did.

Almost half of real estate agents -- 47 percent -- charged less than 6 percent commission, with 29 percent collecting exactly 6 percent, and 24 percent more than 6 percent. A small minority -- 1 percent -- collected commissions in excess of 8 percent.

Real estate agents' fees were related to both house values and to down-payment amounts. For two houses of the same value, commissions were lower when the buyer had a smaller down payment. Real estate agents' fees rose when the fraction of adults in a neighborhood who have a college education increased. Although commissions averaged $55 lower in Latino neighborhoods, no other relations to individual or neighborhood were revealed.

***

What's your opinion? Leave your comments below or send a letter to the editor.

All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.