May 8, 2017
What Is An Origination Fee?
Realtor.com quoted me in What Is an Origination Fee, and How Much Does It Cost? It opens,
In the seemingly never-ending mortgage lexicon of home buying and selling, one term in particular stands out as a source of confusion: the origination fee. What is an origination fee? It’s something every homeowner needs to understand. And the good news is that it’s not actually that complicated.
In basic terms, an origination fee—sometimes referred to as a discount fee—is money that a lender or bank charges a client to complete a loan transaction. An origination fee can encompass a variety of different fees added together, says Mark Ventrone, owner and broker with ABLEnding, based in California and Arizona. It can include underwriting fees, administrative fees, processing fees, discount fees (also known as points), and any other fee charged by the lender and/or broker to the borrower.
Origination fee vs. points
Lenders generally speak about the money associated with origination fees as points. The term “point” is slang for 1% of the loan amount; 1 point = 1%. And points are part of those aforementioned closing costs charged by your lender, calculated as a percentage of the principal, says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”
If your loan is for $300,000, one point equals 1%, or $3,000, and two points equals 2%, or $6,000.
Because “points” is not an official term, you won’t see the term on disclosures, but you will see it in marketing materials and hear the term from lenders.
What does the origination fee cover?
Lenders charge an origination fee in part because they have upfront costs in originating a loan (origination fee—get it?), so they try to recoup that money with a fee, says David Reiss, a law professor and academic program director for the Center for Urban Business Entrepreneurship at Brooklyn Law School.
If a lender doesn’t do this, it risks the borrower paying off the mortgage early and before the lender fully recoups the cost of generating the mortgage. And let’s face it—lenders might also charge an origination fee because it can be a profit center for them just like the interest rate.
Another way to think of an origination fee, according to Fleming: It’s the cost a borrower pays a bank for the chosen interest rate.
What does an origination fee cost?
Putting an exact dollar amount on origination fees can be a bit difficult because they are expressed as a percentage of the loan amount. But a standard origination fee for a conventional loan—or a loan amount up to $424,100—typically runs between $750 to $1,200, says Ventrone.
To see the breakdown of your origination fee, check out Page 2 of the loan estimate your lender provides.
“Each fee will be itemized separately in Box A so you will know exactly what you are paying for,” says Ventrone.
If a loan is $200,000 and the lender is charging a half-point (0.5%) to originate the loan, the borrower will need to pay an additional $1,000 in closing costs, says Reiss. If the lender is charging one point (1%), the fee would rise to $2,000. The origination fee generally ranges from 0.5% or 1% of the loan amount, but it can change depending on the bank and the client.
May 8, 2017 | Permalink | No Comments
May 5, 2017
Banks v. Cities
The Supreme Court issued a decision in Bank of America Corp. v. Miami, 581 U.S. __ (2017). The decision was a mixed result for the parties. On the one hand, the Court ruled that a municipality could sue financial institutions for violations of the Fair Housing Act arising from predatory lending. Miami alleged that the banks’ predatory lending led to a disproportionate increase in foreclosures and vacancies which decreased property tax revenues and increased the demand for municipal services. On the other hand, the Court held that Miami had not shown that the banks’ actions were directly related to injuries asserted by Miami. As a result, the Court remanded the case to the Eleventh Circuit to determine whether that in fact was the case. This case could have big consequences for how lenders and others and other big players in the housing industry develop their business plans.
For the purposes of this post, I want to focus on the banks’ activities of the banks that Miami alleged they engaged in during the early 2000s. It is important to remember the kinds of problems that communities faced before the financial crisis and before the Dodd-Frank Act authorized the creation of the Consumer Financial Protection Bureau. As President Trump and Chairman Hensarling (R-TX) of the House Financial Services Committee continue their assault on consumer protection regulation, we should understand the Wild West environment that preceded our current regulatory environment. Miami’s complaints charge that
the Banks discriminatorily imposed more onerous, and indeed “predatory,” conditions on loans made to minority borrowers than to similarly situated nonminority borrowers. Those “predatory” practices included, among others, excessively high interest rates, unjustified fees, teaser low-rate loans that overstated refinancing opportunities, large prepayment penalties, and—when default loomed—unjustified refusals to refinance or modify the loans. Due to the discriminatory nature of the Banks’ practices, default and foreclosure rates among minority borrowers were higher than among otherwise similar white borrowers and were concentrated in minority neighborhoods. Higher foreclosure rates lowered property values and diminished property-tax revenue. Higher foreclosure rates—especially when accompanied by vacancies—also increased demand for municipal services, such as police, fire, and building and code enforcement services, all needed “to remedy blight and unsafe and dangerous conditions” that the foreclosures and vacancies generate. The complaints describe statistical analyses that trace the City’s financial losses to the Banks’ discriminatory practices. (3-4, citations omitted)
Excessively high interest rates, unjustified fees, teaser interest rates and large prepayment penalties were all hallmarks of the subprime mortgage market in the early 2000s. The Supreme Court has ruled that such activities may arise to violations of the Fair Housing Act when they are targeted at minority communities.
Dodd-Frank has barred many such loan terms from a large swath of the mortgage market through its Qualified Mortgage and Ability-to-Repay rules. Trump and Hensarling want to bring those loan terms back to the mortgage market in the name of lifting regulatory burdens from financial institutions.
What’s worse, the burden of regulation on the banks or the burden of predatory lending on the borrowers? I’d go with the latter.
May 5, 2017 | Permalink | No Comments
Friday’s Government Reports Roundup
- The Financial Services Committee of Congress narrowly passed the Financial CHOICE Act, H.R. 10. Democrats were unhappy about the initial proposal of the new bill. The group took measures to stall the mark-up and voice their opinions regarding the “Wrong Choice Act.” This 591 page bill seeks to end bailouts for big banks resulting in bankruptcy.
- The Federal Open Market Committee refused to raise interest rates. Economic activity decreased in the month of March while job gains remained stagnant. Although this is great news for now, the committee plans to increase rates at two additional points this year.
- The Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to review various rules implemented withing five years of their effect. The CFPB committed to reviewing the “mortgage servicing rule” which protected borrowers against mortgage loan servicing practices.
May 5, 2017 | Permalink | No Comments
May 4, 2017
Running Circles around the CFPB
Lauren Willis has posted The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension to SSRN. It addresses an important subject — the cat and mouse game of the regulator and the regulated. The abstract reads,
To ensure that consumers understand financial products’ “costs, benefits, and risks,” the Consumer Financial Protection Bureau has been redesigning mandated disclosures, primarily through iterative lab testing. But no matter how well these disclosures perform in experiments, firms will run circles around the disclosures when studies end and marketing begins. To meet the challenge of the dynamic twenty-first-century consumer financial marketplace, the bureau should require firms to demonstrate that a good proportion of their customers understand key pertinent facts about the financial products they buy. Comprehension rules would induce firms to inform consumers and simplify products, tasks that firms are better equipped than the bureau to perform. (74)
The Bureau has worked hard to tackle financial education in a meaningful way, but Willis is right that this is a Herculean task given the profit incentive that financial institutions have to run circles around consumers and the Bureau itself. Willis explains
the feebleness of mandated disclosures, the inherent flaws in the alternatives the CFPB has been pursuing, the advantages firms have over regulators in ensuring their customers’ comprehension, and the CFPB’s legal authority to require customer confusion audits and enforce comprehension rules. I then elaborate on a few examples of how this form of regulation might operate in practice, including these four key elements:
1. Measuring the quality of a valued outcome (comprehension) rather than of an input that is often pointless (mandated or preapproved disclosure);
2. Assessing actual customer comprehension in the field as conditions change over time, rather than imagining what the “reasonable consumer” would understand or testing consumers in the lab or in single-shot field experiments;
3. Requiring firms to affirmatively and routinely demonstrate customer understanding, rather than relying on the bureau’s limited resources to examine firm performance ad hoc when problems arise ; and
4. Giving firms the flexibility and responsibility to effectively inform their customers about key relevant costs, benefits and risks through whatever means the firms see fit, whether that be education or product simplification, rather than asking regulators to dictate how disclosures and products should be designed. (76) (footnotes omitted)
Hopefully the Bureau will take a serious look at Willis’ critique. It is important, of course, to get consumer financial literacy right in order to benefit consumers directly. But it is also important for the Bureau to get it right in order to protect its reputation as an effective regulator that brings real value to the consumer finance sector.
May 4, 2017 | Permalink | No Comments
Thursday’s Advocacy & Think Tank Roundup
- Homeowners in the U.S. are better at paying their loans. The number of “seriously delinquent mortgages” dropped 1.2 million in the 2016 fiscal year. Today’s negative equity has decreased in the first quarter of the year; however, many pockets throughout the U.S. continue to have high negative equity.
- Goldman Sachs recently paid one-third of it’s 5 billion dollar settlement obligation. In 2016, the financial giant settled with consumers due to their use of “toxic mortgage bonds.” So far entities such as the National Credit Union Administration and the Federal Home Loan Banks of Chicago received millions of dollars as part of this settlement.
May 4, 2017 | Permalink | No Comments
Wednesday’s Academic Roundup
- Prioritizing Which Homeless People Get Housing Using Predictive Algorithms, Flaming and Toros
- Liquidity Constraints in the U.S. Housing Market, Gorea and Midrigin
- Why are Reits Currently so Expensive?, Nieuwerburgh
- The Impact of Housing Prices on Health in U.S. Before, During, and After the Great Recession, Sung
May 3, 2017 | Permalink | No Comments
May 3, 2017
Hope for the Securitization Market
By David Reiss
The Structured Finance Industry Group has issued a white paper, Regulatory Reform: Securitization Industry Proposals to Support Growth in the Real Economy. While the paper is a useful summary of the industry’s needs, it would benefit from looking at the issue more broadly. The paper states that
One of the core policy responses to the financial crisis was the adoption of a wide variety of new regulations applicable to the securitization industry, largely in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). While many post-crisis analysts believe that the crisis laid bare the need for meaningful regulatory reform, SFIG members believe that any such regulation must:
In this paper, we will distinguish between the types of regulation we believe to be necessary and productive versus those that are, at the very least, not helpful and, in some cases, harmful. To support this approach, we believe it is helpful to evaluate financial market regulations, specifically those related to securitization, under three distinct categories, those that are:
1. Transactional in nature; i.e., directly impact the securitization market via a focus on underlying deal structures;
2. Banking rules that include securitization reform within their mandate; and
3. Banking rules that simply do not contemplate securitization and, therefore, may result in unintended consequences. (3)
The paper concludes,
The securitization industry serves as a mechanism for allowing institutional investors to deliver funding to the real economy, both to individual consumers of credit and to businesses of all sizes. This segment of credit reduces the real economy’s reliance on the banking system to deliver such funding, thereby reducing systemic risk.
It is important that both issuers of securitization bonds and investors in those bonds align at an appropriate balance in their goals to allow those issuers to maintain a business model that is not unduly penalized for using securitization as a funding tool, while at the same time, ensuring investors have confidence in the market via “skin in the game” and sufficiency of disclosure. (19)
I think the paper is totally right that we should design a regulatory environment that allows for responsible securitization. The paper is, however, silent on the interest of consumers, whose loans make up the collateral of many of the mortgage-backed and asset-backed securities that are at issue in the bond market. The system can’t be designed just to work for issuers and investors, consumers must have a voice too.
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May 3, 2017 | Permalink | No Comments