For some reason, I have received a number of letters recently that criticized some articles I had written back in 1998-99 on lender junk fees. These articles are on my Web site, and since nothing about junk fees has changed since they were written, I have never had occasion to revise them.
In response to the criticism, however, I took a fresh look at the articles and realized that something had changed since they were written: me. My take on junk fees is a little different now than it was eight years ago, I hope because I’m smarter but perhaps only because I’m older.
Mortgage junk fees are all upfront lender charges other than points. They include all lender charges expressed in dollars, such as “processing fee,” “lender attorney fee,” “endorsement fee” — the list goes on and on. Junk fees also include one charge expressed as a percent of the loan, called “origination fee.”
I don’t like the term “junk fees” and wish it had never been coined. The reason is that borrowers tend to interpret it to mean that the lender is performing no real service and/or that a particular fee is too large. This mindset causes borrowers to look for information about how large a particular fee ought to be, and to bargain with the lender to get one or more fees reduced.
This is almost always a waste of time. If a lender is using excessive fees to pad his bottom line, and some do, a home purchaser typically will not learn about it until he is so far along in the process that his bargaining power is nil. On refinances, borrowers have bargaining power right to the end if they are prepared to walk away from the deal, but few are.
Many readers have suggested that I provide benchmarks as to what they might expect to pay for different lender services. I wince when I receive these because such benchmarks would encourage the tendency of borrowers to examine the reasonableness of individual charges, which is not what mortgage shoppers should be doing. They should be comparing the total charges of different loan providers.
In my view, fixed-dollar fees and origination fees are “junk” for reasons other than being overpriced, though many are overpriced. Reason number one is that information about junk fees is extremely difficult to obtain early enough to be useful in shopping. In this respect, junk fees are very different from points, the other type of lender charge.
Points are an upfront lender charge expressed as a percent of the loan amount. Because points are viewed as part of the cost of credit, they are displayed wherever the interest rate is displayed. When you are quoted a price on a mortgage or see a quote in the media, it invariably includes the interest rate and points. Very seldom does it include junk fees.
Reason number two is that origination fees, the worst of the junk fees, are deliberately deceptive. Origination fees are expressed as a percent of the loan, just like points, but they that are not disclosed as points. They are points in disguise. Their entire purpose is to allow the lender to appear to be charging fewer points than is in fact the case.
Reason number three is itemization, which also confuses borrowers. Junk fees are itemized fees. Lenders are not required to itemize their charges and a few (including E-Loan and Amerisave) don’t. These lenders charge one fee. But most of the rest itemize because they believe that they can extract more in total from the borrower that way.
Lenders who itemize reduce their vulnerability to comparison shopping. Itemization shifts the consumer’s attention away from total fees to the validity of individual charges. Those who diddle about a particular charge are not likely to be comparison shopping, for which purpose a total is needed.
Reason number four is that junk fees are never locked! When lenders “lock the rate,” they commit to a specified rate and points known to the borrower. Except for a few lenders, they do not commit to a specified amount of total junk fees. The Good Faith Estimate (GFE) that lenders are obliged to provide borrowers shortly after receiving a loan application shows all junk fees but doesn’t bind lenders. They can revise the GFE right up to closing.
Bottom line: Junk fees are good to know about so you can ignore them. In addition to the rate and points, your focus should be the total of other fees. When you are shopping, ask the lender for that total in writing, and if the lender will lock it at the time he locks the rate and points. Most lenders will lock it in if you demand it when you are in shopping mode.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.