Monday, February 14, 2011

Great credit means nothing if you want a mortgage. Yes, fees for home loans are increasing. The loan giants are calling it a “risk fee”. To avoid a fee or to get a discount, most borrowers will need a FICO score of 740 or better and a down payment of 25% or more. The increases affect most loans with longer than 15-year terms . So, with this increase, if you were purchasing a $200,000 home with a 20% down payment and a FICO score of 700 you would have to pay a $1,600 “risk fee”. I remember when this was called discount points, you know a discount in the mortgage rate if you were willing to pay some up front money at the time of application or closing. The net effect is now to raise the interest rate on the loan or collect the fees up front.
The banks will tell you that it’s not their fault, it’s the government agencies, you know Fannie Mae and Freddie Mac that are charging the fees. In reality it’s just like taxes were supposed to be. The tax or in this case the fee was supposed to be charged the bank making the loan. The fee was to insure that the risk on these loans was accurately reflected so that when the big buyers and resellers, Fannie and Freddie sold the loans to investors the investors knew the level of risk involved based on the fees charged. Now the banks are just passing the fees along to the borrowers and not absorbing any of the costs or the discounts, just simply collecting more fees. Haven’t we seen this before? Banks adding on fees to loans that borrowers are desperate to obtain. Isn’t this how we got to where we are now?
Now the banks will tell you that the insurers are the bad guys. Fannie and Freddie will tell you that they are forced to do this because of all the bad things that the banks and mortgage lenders have done in the past. The bottom line is that the borrower, the little guy, the potential home owner is the one who has to pay the bill.
While not huge, the new fees are unusual because they are being added to more loans to borrowers with higher credit scores. “For the first time, these fees apply to virtually everybody,” says Keith Gumbinger of mortgage research firm Freddie and Fannie announced the changes last year. They’re intended to more accurately reflect changing risks in the housing market. Given today’s low interest rates, they don’t expect these new fees to scare anyone away from their mortgage deals.
These fees will apply to over 88% of all loans, up from around 70% not long ago. Since the median FICO score is around 711 the fees will hit most borrowers. Freddie says the fees will have a nominal effect on affordability. A 0.25% fee would add less than $10 to the monthly on a 5%, 30 year fixed rate loan for $200,000. We are in the northeast, New York, Boston or Philadelphia a 200,000 loan buys a shoe box, a co-op apartment in a suburb maybe, or a small house far away from the city. While I realize that most of the country pays less for their homes than in the large cities or on the coasts, it’s those areas where $10 a month is a lot of money. When your unemployed the ten bucks is a lot of money. How about the banks, 200million or more a year in profits, pay the ten bucks?

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