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YSP Top Borrower Abuse

Organizations provide preventative guidance for loan prospects

May 19, 2005


The most common abuse borrowers are subjected to is excessive yield spread premium, according to a homeowner watchdog group -- which also says lead generation companies land loan prospects with higher cost lenders.

The Justice & Integrity Project announced its National Mortgage Complaint Center reported 10 common mortgage fee abuses in 2005.

"The problem: in increasing numbers, mortgage lenders and mortgage brokers are overcharging the average U.S. homeowner," the group said. "While state and federal agencies proclaim there is consumer protection, there is little to no evidence to support their claim."

The Project reportedly inspects, for a nominal fee, the mortgage documents of individuals about to purchase or refinance a home to try to prevent consumers from being overcharged, and reviews documents of closed loans as well for signs of possible overcharging.

Yield spread premiums are most common type of fee abuse, the Seattle-based organization reported. While YSPs were designed to "slightly" increase the borrower's interest rate to compensate the lender or broker for origination fees and other normal mortgage fees, many often charge the normal fees, along with a poorly disclosed "yield spread fee." Thus, the borrower unwittingly ends up paying for mortgage origination fees twice.

Next to yield spreads, "title insurance" fees are the biggest overcharge in the mortgage process, according to the announcement. Regardless of a home's value, title insurance costs should be about $300 to $400 as the process is no different for any borrower and basically resembles doing an appraisal, or processing a loan application. However, purchase borrowers reportedly sometimes pay $6000 or more "for what really amounts to about five minutes of time for a title clerk to check a property title for tax lien, mechanics lien or pending lawsuits."

Additionally, over 70 percent of all borrowers do not receive their Good Faith Estimate or Truth in Lending Statement within three business days after applying for a loan, the Project said, noting that without such disclosures the borrower has no real way of knowing what the mortgage fees or interest rate will be.

Prepayment penalties are also a "huge problem" as these are "rarely disclosed to the homeowner in an understandable way" and sometimes are not disclosed until closing -- when most borrowers receive a Truth in Lending Statement, the Project reported.

Borrowers are reportedly also duped through a "document preparation fee," which in a mortgage is an overcharge or a fee associated with a service that should be covered by the loan origination fee, the announcement said.

While lenders are not allowed to up-charge third party costs such as appraisals or credit reports, many credit reports are reportedly being charged as high as $65.00 although the cost to lenders is usually only between $6.00 to $18.00.

Also, costs for shipping closing documents from the lender to the escrow company, known as courier fees, range from $40 to $100 on most mortgage transactions even though a standard closing package overnight express to any location nationwide should only be $22, according to the Project.

Borrowers are also overcharged through "application fees," which could be called a "junk mortgage" fee and should be more than covered by the mortgage origination fee -- yet are in roughly half of the mortgage transactions inspected each year, the Project noted.

Mortgage referral services, which sell leads to mortgage companies, are another common way in which borrowers can fall prey to higher costs. According to the Project's announcement, some of the leads are sent to the most expensive lenders, resulting in a loan with a higher interest rate than deserved, higher monthly mortgage payments and higher mortgage fees.

"Much of this news is grim for the mortgage industry and title insurance industry," the Project said. "Banks, mortgage bankers and brokers may now have enormous liability because of these overcharges."

In addition to avoiding overcharges, borrowers can avoid other costly mistakes, according to an announcement from Money Management International.

The first step is for loan prospects to analyze their front and back debt-to-income ratios, the nonprofit credit counseling service said. For a typical loan insured by FHA or VA, about 33% of gross income is expected to be available for a mortgage payment -- the front ratio, which includes principal, interest, insurance, taxes and assessments.

Prospects should not confuse the terms "qualify" and "afford," and keep in mind that that a mortgage payment, plus ongoing debt, should be no more than 41 percent of gross income -- the back ratio -- to avoid struggling, according to the announcement.

Many mortgage hunters shop for a monthly payment, but should also look at the big picture when comparing mortgage products, Money Management said, citing the example of the 40-year mortgage -- which may offer a slightly lower monthly payment than a 30-year mortgage, but costs more in interest over the life of the loan and a slower pace of building equity.

Some prospects also underestimate the true costs of homeownership, according to the Houston-based organization, and a realistic budget should be created to be prepared to cover everything from upfront costs, the down payment and closing costs of the loan to REALTOR's fees, property taxes, homeowner's insurance and all other things that many people are surprised to find are necessary once they actually move into the house.

The announcement also suggested that many prospects do not attempt improving their financial standing before shopping for a mortgage, a mistake that can lead to a larger down payment than normal and a higher interest rate if an individual has less-than-perfect credit.

Coco Salazar is an assistant editor and staff writer for MortgageDaily.com.

email: [email protected]

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