It's Like Herding Cats-Your Closing
Costs Go Many Different Directions

Through the course of your purchase or refinance transaction
there are many companies that perform services essential to
the timely and successful closing.

When you review your good faith estimate at the beginning of
the transaction, or your closing statement from the escrow
company at the conclusion of it, you will see fees being
disbursed to many different service providers. You may also
wonder who they are and what did they do to earn their fee.

Let's work our way through a typical escrow closing (or settle-
ment) statement, and describe the services that were paid for.

APPRAISAL FEE: This goes to the individual appraiser or
the appraisal company that was hired to value the home. Their
job is to ascertain the market value by comparing the home to
be appraised with recently closed escrows on homes that are
most similar.

TAX SERVICE: This fee goes to a company that provides one
of two services to the lender. If you have an impound account
where your taxes are collected monthly with your payment, the
tax service company provides copies of the tax bills each year
to the lender for payment. If you do not have an impound
account, they monitor your property's records so that they can
inform the lender is the taxes are going unpaid. The lender
wants this information because unpaid property taxes can
supersede their lien interest on the property and potentially
wipe out their loan in a tax-sale auction.

FLOOD CERTIFICATION FEE: This fee goes to a company
that reviews the latest maps issued by the Federal Government
that determine where the flood zones are. If your property falls
within a flood zone, there is a separate requirement for you to
purchase Federal flood insurance.

WIRE FEE: When your loan is funded by the lender, the most
widely accepted way to get the funds to escrow is by using
the Federal Reserve wire system. There is a cost that you
end up paying, but it is small compared to relying on the
issuance of a cashier's check. If the check were to create
even a one-day delay, your daily interest cost would be higher
than the wire fee.

PROCESSING FEE: At our mortgage brokerage, there is
a fee that we collect for the processing of your loan. It is a
standard fee that is designed to cover administrative costs in
connection with your loan request.

SETTLEMENT/CLOSING/ESCROW FEE: The escrow company
is responsible for pulling together the various components of
the transaction so that it closes successfully. These would
include the lender, title company, insurance agent, real estate
agents, notary services, homeowner's associations, and of
course the clients. This fee goes to them for their work.

TITLE INSURANCE: You provide a policy of title insurance for
the benefit of the lender to insure them that they have the first
lien on the property. (Or second lien, if that was what they
intended to provide). The lender's lien on the property will
always be behind unpaid property taxes and there may be some
exclusions that run with the property that the lender will have to
find acceptable. There may be special endorsements that are
charged separately in connection with the title insurance.

LOAN SIGNING/NOTARY FEE: In recent years, there has
developed a growing group of independent contractors who
specialize in signing up the clients with their loan documents.
Many times they will either meet the client at the escrow
company, or may travel to the homes or businesses of the
clients to administer the sign-up and notarize their signatures.

DOCUMENT DOWNLOAD: Until recently, the lender would
charge for the creation of the loan documents and they would
send them by messenger to the escrow company to coordinate
the signing. Now that electronic transmission is more readily
accepted, the escrow companies are imposing a modest
charge for paper/toner/time to create the documents.

MESSENGER SERVICES: There is usually a messenger
charge to return the signed loan documents back to the lender.
Since time is of the essence and it is important to be able to
track the documents, messenger service is the best way to
accomplish the return of the documents.

LOAN TIE-IN FEE: This fee is charged by the title company
for receiving the wired loan proceeds and to be the "deep-
pockets" company to be accountable for the funds. Since
escrow companies are not required to have substantial
financial reserves, there is a reluctance to send hundreds
of thousands or millions of dollars to them. Title companies,
on the other hand, have strong financial backing and are
insured by the state. This fee covers some administrative
costs.

LOAN ORIGINATION FEE: Many times we create the new
home loan so that it is priced as a "zero-point" transaction.
That means that the lender will pay us for our service of
originating the loan. Sometimes, the borrower would like to
receive a lower interest rate and is willing to pay the loan
origination fee and receive the benefit of the lower rate over
the life of the loan.

This covers most of the standard fees that are charged in
connection with a new loan on a property.

There has been some attempts to "bundle" the services and
fees to create some economies for the borrower. Title
companies have begun to offer a consolidated price for the
title insurance when using their escrow services. Some
lenders will collect for the appraisal fee and pay it to their
appraiser without it being delineated separately.

But, as you can see, there are a number of different companies
that have each developed their own special area of expertise.
They are necessary service providers to the successful closing
of the transaction and each earn a fee for their service.

Appraisals Are Lower-More Lender Scrutiny

Appraisals Are Reflecting Lower Values
in the Market-And Being Scrutinized More
Closely

Over the past year, property values have stopped their upward
trend, stabilized in some areas, and have experienced a drop
in values in other areas.

It's the appraiser's assignment to ascertain a fair market value
for the subject property. They need to draw upon available data
from closed escrows and current homes listed for sale to help
them reach their conclusions.

The governing idea at work is that if a willing buyer has the
choice to buy any of the properties available and make a comp-
arison as to features and amenities, how much will they pay
for the subject property.

When the appraiser receives their assignment, they need to
perform an inspection of the property. In fact, the final valuation
they give is based on the property condition as of the date of
inspection.

When a client meets the appraiser at the property, they are
often surprised at how little time the appraiser spends at the
home. An experienced appraiser can take the measurements,
make note of the amenities, features and upgrades in the
home and finalize the room count very quickly.

The biggest part of the appraiser's job is to find homes that
have closed escrow or that are currently on the market that
are in close proximity to the subject property and that are
the most similar to the home to be appraised.

The appraiser will then do an analysis of those homes that
they have selected as being the best comparable sales or
"comps", and make dollar adjustments to make the comp
more like the subject property. For example, if the comp
has a superior view to the subject, the appraiser will subtract
their estimate of the value of the difference of that view from
the comp's value.

After making these kind of comparisons on a long list of
features of the homes, the appraiser arrives at an adjusted
value of the comp. They will perform this type of analysis on
3-6 closed sales and current listings to arrived at a reconciled
value of the subject property. It is not an arithmetic average,
but rather a reasoned sense of the value of the subject property
from the conclusions drawn from the analysis of the comparable
properties.

In today's market the closed sales, which may be up to about
6 months old, probably would lead to higher valuations. But,
the appraiser has to consider properties that are currently
listed for sale, and these comps are tending to lead to lower
property valuations.

Even after we arrange for an independent appraiser to perform
the appraisal, the lender is very interested in making sure that
the best possible data has been used to determine value, and
that the dollar adjustments made to come to the final conclusion
are reasonable and valid.

In the event the borrower doesn't make the payments as required,
the lender's final security for making sure that they can recover
the amount of the loan is their ability to force the sale of the
property. If the property value has been inflated, and the lender
does not perform due diligence to make sure that the valuation
is solid, they risk over-lending on a property and not being able
to protect their interests.

Because there has been a reaction from the lenders to tighten
their approval process and not be as lenient as they were 6-12
months ago, we are seeing that there is much more scrutiny
from the lenders in reviewing the appraisals.

It's important to understand that while these new guideline
changes are taking place, and appraisals are getting a closer
look, that the loan request now has more quality control checks
than it did in the past.

At times, this can create last-minute difficulties if a serious
difference of opinion develops between the appraiser and the
person reviewing their work. It may result in delays while the
differences are worked out, or a lesser loan amount being
approved, or the inability to work with that lender on that
property at that time.

I always try to ascertain the underwriting patterns of the lenders
with whom I place loan requests, and if there are changes
occurring that will affect my client. I always do my best to help
the client have a reasonable sense of what to expect on their
transaction.