Closing Costs Crackdown

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Lucky families and individuals who find a home to purchase are discovering it costs more than in the past to close the loan.

• Politicians, regulators and housing policy influencers are noticing, too.
• The White House is expected to soon announce a roundtable to investigate ways to reduce homeownership costs.

This issue of Capital Commentary examines soaring origination and closing fees. Do they fit the definition of “junk fees”?

1-Big Thing: Origination, Closing Costs in the Crosshairs

The Biden administration is expanding its crackdown on “junk fees” by taking aim at mortgage closing costs, setting up a showdown with mortgage lenders and service providers.

The big picture: The administration previously announced plans to target excessive online concert fees, hotel resort fees and credit card late fees. Now, housing finance is feeling the heat.

• President Biden used his State of the Union address to announce the steps, including one that will permit Fannie Mae and Freddie Mac to waive title fees on certain refinance loans.
• The Consumer Financial Protection Bureau (CFPB) is nearing release of a Request for Information from the public about ways to reduce origination fees for borrowers.

Why it matters: Home loan closing costs increased nearly 22% for purchases between 2021 and 2022, with the average hitting $6,000, according to the CFPB.

• Borrowers with smaller loans are disproportionately impacted because many closing costs are fixed.

Driving the news: The CFPB has signaled plans to issue new rules and guidance to “improve competition, choice and affordability” when it comes to closing costs on home loans.

• Refinance closing costs surged 49% to an average of $4,979.
• Credit report charges, title insurance premiums and discount fees are high-profile targets.

The administration’s view: Biden officials argue some mortgage fees “benefit the lender but not the borrower” and drive up costs, reducing home affordability.

2. CFPB Chief Blasts Credit Score Fees

Rohit Chopra used a major speech to take aim at credit-reporting-industry fees that, in some cases, are up 400% since 2022.

Speaking at the Mortgage Bankers Association’s Secondary Conference recently, the Director of the CFPB called out the “credit reporting conglomerates” for capitalizing on their market dominance by enacting steep price hikes that far outpace inflation.

What they’re saying:

“In many cases, a handful of firms have cornered the market, allowing those companies to levy a tax on every mortgage application or transaction in the country … Mortgage lenders have no choice but to pay for these increased fees.”

• The big credit reporting agencies — Equifax, Experian and TransUnion — are jacking up fees for providing credit reports and scores to mortgage lenders, driving up costs for home purchases, Chopra warned.

Between the lines: The CFPB is looking at ways to dilute the credit bureaus’ pricing power, including promoting “open banking” that would allow lenders to assess borrowers based on their real financial data instead of just credit scores.

What’s next: The CFPB could issue new rules capping fees the credit agencies can charge for credit reports used in mortgage lending. The regulator is seeking input from lenders on whether to take action against alleged “price gouging.”

3. Former Freddie CEO Stokes Fire

Closing costs are excessive and severely damaging for first-time homebuyers, according to a new analysis from Don Layton of the NYU Furman Center. Layton is a former CEO of Freddie Mac.

Why it matters: The paper argues that excessive closing costs aren’t the result of an efficient market but rather stem from an uncompetitive environment where normal price pressures have been distorted.

• Layton cites two in particular worthy of reform: title insurance and real estate commissions.

What they’re saying:

“The reason for the (Biden administration’s) focus on title insurance is that it is objectively very overpriced. Specifically, the ‘loss ratio’ tells a very clear — and damning — story.”

The author argues that title insurers are paying out just 3% of premiums in claims — meaning 97% gross profit margins.

• Look to Iowa? Layton noted that in Iowa, which banned private title insurance, premiums charged by a state-run provider, average around $175 — up to 90% less than the $1,500–$3,000 common in other states.

4. Industry: “Junk Fees? Nonsense.”

To paraphrase a line from the 1976 movie “Network,” MBA CEO Bob Broeksmit is “mad as hell,” and he isn’t going to take this anymore.

• “Washington is tying us in ‘regulatory knots,’” complained Broeksmit in his opening address to attendees at his group’s Secondary Conference in New York City. The CFPB, he said, “is at the center of many” of them.

Why it matters: Broeksmit argues that the fees the CFPB is targeting aren’t “junk” at all. Rather, they are mandated by the federal agencies.

What they’re saying:

“They pay for services like appraisals, credit reports and flood certifications. Fannie Mae, Freddie Mac, the Federal Housing Administration, the Department of Veterans Affairs and the USDA can’t guarantee a mortgage without these things, for good reason. They provide tangible benefits to borrowers and protect taxpayers. But now the CFPB is attacking them.”

Broeksmit also pushed back on the Biden plan to eliminate title insurance for refinances.

“Clear title protects borrowers, lenders and investors and is required by Fannie and Freddie before they purchase a loan.”

He has an ally in the American Land Title Association.

• The trade group for the title insurance industry blasted Biden’s announcement as a “purely political gesture offering a false promise of savings for homeowners while exposing consumers, lenders and taxpayers to greater financial risk.”
• The decision to allow the GSEs to waive title “is a hollow attempt by the White House to placate Americans’ current economic frustrations.”

Our thought bubble: First thing to remember is 2024 is a presidential election year.

• Politics, not policy, is driving the agenda.
• The administration knows that the reason housing costs are so high is that there is a severe shortage of homes. But that can’t be solved between now and November.

The bottom line: Polls show Americans are more concerned with the costs of homeownership than the supply of homes. At least for the next six months, then, expect to see administration figures promoting ways to cut the costs of buying homes as a way to attract votes for the incumbent president.