Lenders raise fees to counter low interest rates to protect their bottom line

May 13, 2009 by Curt Siters

Lenders are pumping up other fees to compensate for the lower interest rates that are luring many buyers back into the housing market.

By Smart Money

Mortgage lenders may be offering loans at record low rates, but that doesn't mean the loans are coming cheap.

In fact, borrowers may see much of the savings they'd realize from lower rates wiped out by closing cost, fees that are on the rise as lenders seek to pad their bottom lines.
"Frankly, lenders are struggling to make mortgages on a profitable basis in order to ensure survival," says Keith Gumbinger, a vice president at mortgage information firm HSH Associates. "And you can, as a lender, help to increase your profitability by an increase in fees."

As homeowners rush to lock in those rock-bottom mortgage rates, lenders' costs of doing business increases. For example, whenever a lender locks in a rate for a prospective borrower, that action incurs administrative costs, even if the loan doesn't close. Should the borrower fail to get approved, change his or her mind or jump on a lower rate elsewhere, the lender is still on the hook for the costs.

"As these locks fall out, each loan gets more expensive for you (as a lender), so you pass on that cost," Smith says.

As a result, borrowers may encounter higher underwriting or administrative fees, along with bigger charges from appraisers, mortgage insurers and mortgage finance companies Fannie Mae and Freddie Mac.

When shopping for a mortgage, ask lenders to provide you with written good-faith estimates so you can compare costs, says Frank Ruzicka. Here are four fees to watch for:

1. Processing fees
   Whether they're called administrative, application, underwriting or processing charges, these fees are on the rise as lenders compensate for the lower-rate loans that they offer to be competitive. While charging an application fee of several hundred dollars is normal, piling on several additional charges for the same amount of work is not.
2. Fannie's and Freddie's cuts
   On April 1, Fannie Mae and Freddie Mac yet again increased fees for loans they purchase or insure. Depending on a borrower's credit scores and the size of his or her loan relative to the home's value, these so-called loan-level price adjustments can range from 0.25% to 3% of the loan. Another 0.25% to 3% is added for cash-out refinancing (when borrowers refinance with loans that are bigger than what they owe on their existing loans so they can have some cash left over).
   For someone in the credit score range of 660 to 679, a 30-year fixed-rate mortgage that is 85% of the home's value would incur 2.5% in fees. (Before April 1, that same loan would have cost 1.75%.)
3. Appraisal fees
   Thanks to the Home Valuation Code of Conduct -- a set of regulations on property appraisals that went into effect May 1 -- lenders that deliver loans to Fannie Mae and Freddie Mac are now prohibited from selecting or communicating with appraisers. This may cause them to collect appraisal fees upfront whether the loan goes through or not, Republic Mortgage's Smith says.
   If a borrower wants to refinance a home she thinks is worth $300,000, for example, but an appraiser values it at $200,000 and the loan doesn't go through, the appraiser still has to be paid. Appraisers are also being required to use a new form that they estimate adds 45 minutes to the time it takes to complete an appraisal. "We charge by the hour, so it will drive up costs," says Brad Charnas, an appraiser in Cleveland.
4. Private mortgage insurance
   As mortgage insurance companies move to so-called risk-based pricing, private mortgage insurance , which is required of anyone purchasing or refinancing a home with less than 20% equity, is getting more expensive for borrowers with lower credit scores.

When purchasing a home you are making what could be a lifelong commitment. Very few people actually read the contract they are signing and fewer still understand all the "legal speak" contained in it.  A lot of the recent mortgage crisis may have been averted by people understanding what is written into their mortgages and how changes in the economy may affect their payments.

If you rely on the lenders' lawyers to protect you, you are taking your chances. By law, and common sense, you should have your mortgage reviewed by an attorney. - C