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YSPs Don't Reduce Fees

HUD announces report on closing cost disparities

May 30, 2008

By MortgageDaily.com staff

A new study found that government-insured mortgages with higher rates due to yield-spread premiums didn't generally have lower closing costs. Other findings included a disparity in closing costs for identical borrowers.

The report, from the Urban Institute, found borrowers with the same credit characteristics are paying significantly different costs for their mortgages, the Department of Housing and Urban Development announced Thursday. The study was conducted by economist Dr. Susan Woodward.

The findings were based on an analysis of more than 7,500 purchase-money, fixed-rate mortgages with 30-year terms that were insured by the Federal Housing Administration and originated in May and June, 2001, "a period of relative interest rate stability."

Total loan fees and title fees varied by thousands of dollars for different borrowers with the same mortgage amount, loan terms and credit scores. Woodward called the variances "unsupported."

Minorities experienced the brunt of the higher charges, with black borrowers paying an average of $415 more in total loan origination fees than non-minorities and Hispanics paying an average of $365 more. Other factors that impacted closing costs included education level and geography -- though even after adjusting for these factors there were still substantial variations in closing costs.

In some cases, the report indicated that title costs in the same state for identical borrowers varied by more than $1,000.

One of the most significant findings was that YSPs generally did nothing to reduce closing costs.

"On average, borrowers see no reduction in out-of-pocket fees when they agree to higher interest rates," the announcement said. "Ideally, consumers ought to receive a dollar-for-dollar credit for paying a so-called 'yield-spread premium' that results from agreeing to a higher interest rate loan.

"In fact, many borrowers see no reduction at all and even pay more in total loan fees."

HUD blamed the "mountain of documents" involved in a mortgage closing for the disparities and suggested that a revised Good Faith Estimate it has proposed would limit "fee creep" at closing and save the average borrower around $700.

Yield Spread Premiums
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