The Federal Bureau of Consumer Protection last week launched an investigation into what the agency calls “junk fees in mortgage closing costs.” These additional fees, which include home appraisals, title insurance and other services, have increased in recent years and can add thousands of dollars to the final cost of buying a home.
Here's a deeper dive into the extra mortgage fees buyers pay before they even get the keys to their new home, and why the CFPB is currently looking into five types of charges in particular.
What are junk mortgage fees?
According to the CFPBJunk rates are those that “far exceed the marginal cost of the service they are intended to cover.”
While mortgage companies can charge a home buyer more than 200 different fees to close on a property, the CFPB is particularly interested in five types of fees and services that have seen price spikes in recent years, said a agency official to CBS MoneyWatch. They include discount points, credit report fees, home appraisal fees and title insurance.
Discount Points – Also known as “mortgage points,” discount points are upfront fees that homebuyers pay to lower the interest rate on their home loan. Mortgage companies pocket the purchase fee, as it is sometimes called.
Credit Report Fees: As the name suggests, credit report fees are what home lenders charge buyers to run a credit report on the borrower. These fees go to the three major credit reporting agencies: Equifax, Experian or TransUnion.
Home Appraisal Fees – Also known as property appraisal fees, these are fees that lenders charge home buyers to have a private appraiser visit the property being purchased and place a market value right at home
Title Insurance Fee: Mortgage companies also charge home buyers to obtain a title insurance policy, which covers the lender in the event a lien is placed on the property once a title search is done.
Mortgage origination fee: Typically between 0.5% and 1% of the cost of the home itself, the mortgage origination fee is what the home lender charges a home buyer home to start a new home loan application.
Why have these rates increased in recent years?
For the most part, home appraisal and credit reporting rates have increased due to rising inflation and rising labor costs, one expert told CBS MoneyWatch, but the fees for creating mortgages are a different story.
“Some of these are set as a percentage of the transaction price of the home,” said Susan Wachter, a real estate professor at the University of Pennsylvania who studies housing finance. “When housing prices are risingso do the rates.”
Wachter said now is a good time for the CFPB to look into what drives up closing fees, but stressed that many of the services and fees are essential to the home buying process.
What is the government's concern about junk mortgage fees?
The CFPB is concerned that unwanted fees could affect homebuyers' ability to make a reasonable down payment on their home. Excessively high closing fees can also cause buyers to fall behind on their mortgage payments, officials believe.
The typical homebuyer paid roughly $6,000 in loan closing costs in 2022, an amount that included paying for discount points, title insurance, appraisal, credit report and other fees, according to the CFPB. That's up from $4,889 in 2021.
The agency is investigating whether mortgage fees have risen too much, along with possible solutions such as new regulation to lower them, eliminating certain fees or making someone other than the homebuyer pay the fees rates, the official told CBS MoneyWatch. For now, the CFPB has asked home buyers to share stories of how much they paid after closing on a home. This information will be used to determine the agency's next step.
How do expensive mortgage fees affect home ownership?
The US home ownership rate has fallen from 66% in 2023 to 65.6% in the first quarter of 2024. The two biggest obstacles to rising home ownership rates are the lack of affordable properties and the inability of buyers to save for to a down payment, according to the research. of the National Association of Realtors. Excessive mortgage fees compound these obstacles by eating into the purchasing power of homebuyers.
According to Wachter, garbage fees keep financially strapped potential homebuyers away. In most areas of the country, it is cheaper to rent a home than to buy and “that's because of the down payments and those fees,” he said.
“It makes becoming a homeowner daunting,” Wachter said. “And rents are high, too, so for young adults who live with their parents or with their friends, [obtaining homeownership] it's much harder for them than their older siblings or their parents.”
What are banks and lenders saying about excessive closing fees?
The Mortgage Bankers Association (MBA), the trade group that covers real estate financing, said there is little lenders can do to reduce or eliminate mortgage closing fees because the services they cover are legally required.
“Many of these disclosed costs, such as title, appraisal and credit reports, are required by federal statutes, safety and soundness guidelines, and the Federal Housing Administration, the Department of Veterans Affairs, and Fannie Mae and Freddie Mac as a condition of purchase and insurance,” the association said in a statement last week. “Furthermore, the services covered by these fees mitigate risk for both taxpayers and borrowers.”
The MBA said lenders worked with the CFPB a decade ago to make sure mortgage fees were clearly set out for buyers on mortgage disclosure forms. The rules governing the mortgage process are included in the Dodd-Frank Act of 2010. If the CFPB wants to make changes, amending the Dodd-Frank Act “is the only appropriate vehicle to begin that work,” said the MBA .
