(Housing Wire) Clearly seeking to buttress its proposal to reform the Real Estate Settlement and Procedures Act, the U.S. Department of Housing and Urban Development released a study late Thursday suggesting that brokered loans are, on average, more expensive for consumers than borrowing direct from a lender — and that brokers were pocketing nearly all of the benefits of so-called yield spread premiums for themselves, rather than passing any cost savings on to consumers.
According to the study, which was conducted by researchers at the Urban Institute and used data on originations from May and June of 2001, borrowers saw no reduction in out-of-pocket fees when they agreed to higher interest rates and a yield spread premium. In fact, many borrowers saw no reduction at all in fees and often paid more in total loan fees, compared to borrowers that did not agree to pay a higher interest rate.
The study suggested that loans made by mortgage brokers were approximately $300 to $425 more expensive than those made by direct lenders, other loan characteristics being held equal. Depositories (banks, thrifts, and credit unions) were the lowest cost originator, followed by large mortgage banks. Smaller mortgage banks were found to have terms closer to those of mortgage brokers than to large mortgage banks and depositories, according to the study.
The Urban Institute’s study found significant disparities in closing costs even when it compared borrowers with identical credit scores, loan terms and mortgage amounts; in addition, variations appeared to be based on education level, geography, race and ethnicity as well. Even after accounting for these factors, there remain very substantial variations in what consumers pay at settlement.
“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 A. Bernardi. “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.”
Minorities still paying more?
The study found evidence — sure to fire up consumer advocates — that both Hispanic and African-American families paid more for their mortgages, on average, than did non-minorities. African-American families paid an average of $415 more in total loan origination fees than non-minorities, according to the study; Hispanic borrowers paid an average of $365 more.
A closer inspection of the study’s findings in this red-hot area, however, suggests that the conclusions are less than conclusive evidence of predatory lending practices than one might think. The study’s author cautions as much.
“The interpretation of the race differentials cannot be entirely clear from the data available in this
study,” the study’s author, Dr. Susan Woodward, writes. “The discussion in the later chapter on defaults will reveal that borrowers who live in neighborhoods with a high fraction of African Americans have higher default likelihoods than do other borrowers, other things equal, while Latino borrowers have lower default likelihoods than other borrowers.”
Woodward notes that “default patterns are in the same direction as some of, but not all, the differences in pricing by race.”
Brian Montgomery, HUD Assistant Secretary for Housing and Federal Housing Commissioner, said the study paints an overall picture suggesting that informed consumers pay less.
“The core problem is that too many Americans sign a mountain of documents they don’t understand and pay thousands of dollars for services that they’ve probably never heard of. This report proves that the more informed you are, the less you pay.”
HUD’s proposal to reform RESPA is part of the agency’s effort to reduce what it calls “junk fees” at origination.
In particular, HUD wants to change what information is provided in the so-called Good Faith Estimate that lenders provide to borrowers prior to mortgage closing; HUD wants a standard GFE for both brokers and lenders that discloses key elements of the loan and sources of compensation for third-party brokers.
The proposed GFE would consolidate closing costs into major categories, and display total estimated settlement charges prominently on the first page, a move HUD says will help a borrower more easily compare loan offers. In addition, HUD’s new proposed rules would specify the charges that can — and cannot — change at settlement; for those fees that can change, HUD also would limit the amount of allowable changes.