Closing Costs - An Enduring Topic

Probably the issue that troubles borrowers the most,
and that I receive the most questions about is closing
costs.

In the scope of home transactions that are in the
range of hundreds of thousands of dollars and sometimes
millions of dollars, the closing costs represent a small
percentage.

But, when a borrower looks over their Good Faith Estimate
and sees a long list of fees that accumulate to several
thousand dollars, it's difficult to make sense of what
seems to be repetitive costs.

Let's go through a typical transaction and see where the
money goes, and what services are provided for the fees
being paid.

At the time the offer is accepted, the agents will open
escrow and the title insurance order. These services
would be needed even if there were no new financing
involved, although the title insurance requirement would
be different.

As you begin the loan application process, the first fee
that you encounter is for the credit report. This fee
is paid to a credit reporting agency, and usually costs in
the range of $20.

Next would be the appraisal fee, which is usually paid
for by you at the time it is ordered. This fee is paid
to an appraisal management company who chooses the
appraiser from an approved panel. Typical cost is
$450-$550, depending on the value of the home, and we
usually arrange payment via credit card.

Most originating lenders will have some form of
processing fee. This is paid to the originating
company and is for the work involved in putting
together a file for presentation to the lender's
underwriter. Typical processing fees are in the
$500-$600 range.

Once the file goes to the underwriting group, they
have a fee for the review of the file for approval.
Even if this fee is paid to the originating lender
as a continuation of their process, it is not
uncommon to have two distinct procedures with two
distinct companies involved. This fee is paid to
the underwriting company and is in the range of
$400-$500.

After the file is approved and it is prepared for
closing, the next step is the preparation of loan
documents. This fee may be paid to the lender or
to a contract company for this service. The
typical fee is $250-$300.

Additional fees that come into play include a
flood certification fee of approximately $20
paid to an independent company that looks over
the FEMA flood maps to determine if the property
is required to have flood insurance or not.

Also, there is a tax service fee of approximately
$85 that is designed to do one of two things: If
your loan has an impound account, they supply the
tax bill to the lender for payment. If your loan
does not have an impound account, they monitor your
property so that they can inform the lender if
taxes go unpaid.

If you negotiate an interest rate that involves a
loan origination fee and/or discount fee, these
costs are usually disclosed to you as "points".
One point equals one percent of your loan amount,
so let's say on a loan of $400,000 a point equals
$4000.

There will be a charge, paid to the title insurance
company, for the lender's title insurance. It is
based on the loan amount, and these fees are supposed
to be reguated by the California Insurance Commissioner.

At closing, you will also be requested to deposit
funds if you create an impound account for the payment
of taxes and insurance. You will have pro-rated
interest from the date the loan funds to the first
of the following month to put the loan on a standardized
30-day billing cycle.

You will be asked to prepay your first year's property
insurance premium, and may have a pro-ration of property
taxes depending on whether the seller has already paid
them covering the escrow closing date.

As you assess the closing costs, it is important to
separate them into categories:

Even if there was no new loan: escrow and owner's title
insurance.

Transactional fees that are lender related: processing,
underwriting, document preparation, appraisal, credit,
tax service and flood certification. Negotiated loan
origination and/or discount fees.

Recurring charges: interest on the new loan, pro-rated
taxes, pre-paid property insurance.

Grouping the closing costs in this manner allows you
to make better comparisons between competing lending
companies and loan programs.

Even though the list of closing costs can be rather
imposing, if the lenders were not able to collect
them in their current fashion, they would add the
equivalent to the cost of borrowing in some different
form.

Be wise in shopping for your loan, and make sure to
make valid comparisons among the many choices you
have. As always, contact me for any information that
you may need.

New Appraisal Process Creates New Obstacles

Roger Showley of the San Diego Union-Tribune published
an article in the last week about how the Home Value
Code of Conduct (HVCC) is affecting the real estate
market. Excerpts of his article are in quotes, my
comments are without quote marks.

"New rules governing appraisals, a key step in mortgage
lending, are leading to mistakes, delays, lower home
valuations, higher costs and worse service for would-be
buyers, industry experts say."

A client’s recent appraisal reinforces this point. The
appraiser was not familiar with the area, and he failed
to include a recent sale of an identical home model
in the appraisal. This would have led to a higher
valuation of the property.

"As of May 1, a new “home valuation code of conduct”
generally bars lenders, mortgage brokers and real estate
agents from communicating directly with appraisers and
requires them to work through a middleman."

The regulation was put into place because the regulators
cannot understand how communication between an
appraiser and a lender, mortgage broker or real estate
agent could be anything but a negative influence on
the appraiser.

"Previously, some appraisers had been pressured to verify
a value or face being blackballed from further work by lenders,
brokers and agents. Some analysts believe these ever-increasing
valuations contributed to the real estate bubble and its
subsequent collapse."

Some appraisers were pressured, some were not offered
additional work by lenders. Business is conducted by
parties that can get things done. If you have a service
provider who cannot meet your needs, why would you
hire them? This does not mean that you tell someone
that they have to falsify their product in order to get
more work – that isn’t right. But you seek out service
providers who can help you meet your goals.

The bubble was created because all parties in the process –
borrowers, brokers, agents, lenders, underwriters, investors
and even the easy money policies of the federal government –
all wanted things to move in that direction. Appraisers rely
on historical data, and evidence that the market had topped
out was only available after property values began to drop.

"The new code was worked out last year between New York
Attorney General Andrew Cuomo and mortgage-finance giants
Fannie Mae and Freddie Mac, which applied the rules nationally."

"In a real estate transaction, a buyer makes an offer that is
accepted by the seller, opens escrow and seeks a loan from a
lender or via a mortgage broker. The buyer pays for an appraisal,
costing $400 or more, and the lender uses the results to determine
how much to lend."

"If the appraisal is lower than the sale price, lenders typically
will not fund the difference, and buyers must increase their
down payments or sellers must lower the price to seal the deal."

"Now, buyers and their agents generally are not allowed direct
communication with the appraiser before the appraisal in completed,
and they say they are having trouble fixing mistakes."

"Because appraisers are paid a flat fee for their work, they are
not inclined to make changes, industry observers say. And lenders
do not press appraisers to raise values, remembering the freewheeling
lending of just a few years ago that resulted in millions of foreclosed
properties."

Lenders are very afraid of making any mistakes. They have bank
regulators looking over their shoulder and micro-managing their
lending operations. They are very conservative in their underwriting
so that they have no concerns about the regulators, or their ability
to sell their loans to FNMA and FHLMC. If that means more
paperwork, or answering questions about a file that really doesn’t
move the needle on any risk assessment, or accepting an appraisal
that may not be accurate because it is low, well, that’s just the
way it is going to be in this environment.

"While defenders of the new system say complaints about incompetent
appraisers amount to an “urban myth,” critics say the system could
impede the housing recovery."

"Just as the new code was going into force, some San Diego
neighborhoods were experiencing multiple offers and overbids,
sometimes prompted by low-ball listings posted by lenders hoping
to ignite bidding wars for their foreclosed properties."

"Because appraisers rely on past sales to evaluate present deals,
there is a built-in lag effect in an appreciating market, in which
sales completed several months ago are lower than current prices
being offered. So far this year, MDA DataQuick reports that the
overall San Diego County median has risen from a low of $280,000
in January to $320,000 in July."

"It takes an experienced appraiser to be able to spot a market turn
such as this, one block at a time, experts say. But agents report that
many nonlocal appraisers are submitting inaccurate valuations
because they do not know the territory or understand current pricing
trends."

"The system's new wrinkle is the “appraisal management company,”
sometimes an independent company that contracts with lenders and
sometimes is partly owned by the lender."

"To comply with the new code, lenders now typically hire these
companies to provide appraisals. The companies in turn rely on
thousands of freelance appraisers, chosen at random on a rotating
basis."

We do not “typically” hire these companies, we are required to do
so. So, we put an appraisal request into the company, they reach
into their black box of available appraisers whether they are
qualified for the assignment or not, the appraisal is performed,
and we have to deal with whatever is delivered. It is rare that the
appraisal will be inaccurate on the high side, so the lender is OK
with accepting an inferior product.

"But while the lenders have reportedly increased appraisal fees from
$400 to $500 in the past year, the increase is going to the management
companies, not the appraisers, who often get less than $200 for their
work, disgruntled appraisers say. The theory is that the appraisers
will make up the difference in more assignments now that they do not
have to spend time marketing themselves."

The appraisers are in a tough spot too. Career-oriented, professional
appraisers are being reduced to a commodity. The experience that
they have has been de-valued and they are compensated about half
of what they were previously able to earn for themselves.

"Meanwhile, real estate industry leaders are acting on several fronts.
A bill awaiting Gov. Arnold Schwarzenegger's signature would require
an estimated 150 appraisal management companies doing business in
California to register with the Office of Real Estate Appraisers. Bob
Clark, who runs the office, said the measure would allow his staff to
collect and investigate complaints concerning the state's 16,200 licensed
appraisers. In Congress, two bills would either replace the code or
impose an 18-month moratorium on its implementation. With neither
likely to pass, appraisal industry groups hope to seek modifications."

So the system has developed Appraisal Management Companies, which
in the hopes of consumer protection are no longer consumer-oriented.
And the state wants to regulate the AMC’s and appraisers (read: more
licensing fees to the state) to collect and investigate complaints against
appraisers. The state already has the ability to do that, because appraisers
are licensed currently. But we lose the freedom to conduct business
ethically, and differentiate ourselves with our experience, knowledge,
and professionalism and our abilities to coordinate a team of like-
minded service providers who work for the client: you, the borrower.