RTC Mortgage Blog

The Cost of Regulation

February 5th, 2010 8:36 AM by Richard T. Cirelli

The Cost of Regulation


Over the past year several new Regulations have been introduced by the Government in order to protect the Borrower from unscrupulous loan originators. While I'm sure our Government had good intentions, they result in considerable extra expense to the consumer.


HVCC: The Home Valuation Code of Conduct:

This Regulation prohibits mortgage originators from choosing the appraiser. Now, in order to request an appraisal, we must use an Appraisal Management Company (AMC). The AMC's randomly assign the appraisal to a "local" appraiser.


Since the AMC is a middle-man in the process, they keep a percentage of the appraisal fee charged to the borrower - typically 40%. The Appraiser then gets 60% of the fee which is much less than what he/she was paid prior to HVCC. In order for there to be enough money to pay the AMC and the Appraiser, the cost of the appraisal has increased from an average of $400 to an average of $550. Additionally, the randomly selected appraisers are often under-qualified and unfamiliar with the local market that can cause lower appraised values. Not including the cos t of low-appraised values and the impact they have on Buyers & Sellers:



MDIA: Mortgage Disclosure Improvement ACT

This Regulation requires certain Disclosures to be made before any fees can be collected except for the cost of a Credit Report at the time of application. The collection of the Appraisal Fee and therefore the ordering of the Appraisal must be delayed until after Broker and the Lender have provided certain Disclosures to the Borrower. The Lender is allowed 3 days to send the Disclosures and must allow 3 additional days for the Borrower to receive the Disclosures if using the U.S. Mail. If the rate or other costs increase during the process, a new set of Disclosures must be re-ordered resulting in another waiting period before the loan can close.


The result of this Regulation is that loans now take longer to close. When a Broker or Lender locks in an interest rate they must lock it for a set period of time - 15, 30 45 days, etc. The longer the lender guarantees the interest rate, the higher the cost. If a loan typically took 30 days to close and now it takes 45 days due to the Disclosure regulation, the additional cost to extend the rate lock is .125 - .250 points. On a $400,000 loan that equates to $500 - $1000.




Mortgage Originators are now required to provide a Good Faith Estimate (GFE) of Closing Costs at the time of Application and the Estimate for many of the costs can not vary from the final cost. If the final cost is more than the original estimate, the loan originator must pay the difference. Not only are the loan fees subject to $0 tolerance, but Title, Escrow and other fees are subject to just a 10% tolerance.


In order to protect themselves, Lenders, Title and Escrow Companies are "over-disclosing" their fees in order to provide a cushion for unexpected costs that were unknown at the time of application. I estimate the typical over-disclosure by Brokers & Lenders at $1000. Escrow and Title companies are over-estimating by about $250 each. Once the Borrower accepts the higher fee at time of application, it's unlikely that the Lender, Title or Escrow Company will voluntarily reduce it.




The new Regulations require additional work by Brokers and Lenders. Accordingly, Lenders have increased their fees by $100 to $200 per loan. Additionally, Loan Processors are charging more to process a file due to the extra time involved - typically $100 per loan.



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Posted by Richard T. Cirelli on February 5th, 2010 8:36 AM



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