When Mortgage Rates Dipped, Fees And Charges Soared

Let’s be clear: anyone who has bought or owned a home over the past twenty years won the interest rate lottery. After peaking at 18.45% in 1982, the height of the so-called Reagan Recession, mortgage rates steadily tumbled to the single digits before dipping under 7% after 9/11, then more than halved to under 3% in 2021. Unsurprisingly, home prices have soared, with only a hiccup during the 2008-9 financial crisis. Lucky homeowners cashed out cheap equity in droves and paid off higher-cost debts or bought more stuff, including second homes.

Yet, homebuyers and homeowners found that taking advantage of the dip in mortgage rates did not prevent them from falling victim to exorbitant – and sometimes fraudulent – fees and charges that significantly increased the costs of their mortgages and refis. In other words, they were far from the only ones taking advantage of the Fed-induced real-estate windfall.

What went wrong?

First, it is important to differentiate between “real” mortgage fees and questionable charges. A litmus test is not only whether the fee is standard industry practice, but whether (or not) it results in a valuable – and preferably essential – service. These legitimate fees include title insurance fees, appraisal fees, home inspection fees, application fees, loan origination fees, credit report fees, recording fees, and document preparation fees. 

Everything else is what Experian collectively refers to as a “junk fee.” These are just tacked on charges, like a “resort” fee at a motel with no pool, and they should be quickly removed when the borrower objects. By then, however, the damage has often been done. All that “junk” has obfuscated the true cost of the mortgage and made it impossible for the borrower to compare prices. 

This begs a question: Why should consumers remain in the dark when it comes to their mortgage, which will typically represent a far more significant part of their financial picture than any other type of debt?

They shouldn’t.

MISMO, which stands for Mortgage Industry Standards Maintenance Organization, has promised to create such standards. MISMO is a division of the Mortgage Bankers Association. Its board of directors includes representatives of the country’s largest financial institutions, from Fannie Mae to Rocket Mortgage to Bank of America BAC. So far, so good.

The catch is that MISMO charges a per-mortgage “innovation” fee to any institution that wants a seat at its table. Recently, MISMO has re-focused its energies on digitizing the mortgage process, which will simply create more mortgages and refis, rather than making the process more transparent for consumers. The ultimate goal seems to be more mortgage profits and less transparency.

Failure to create and enforce fair lending standards will certainly result in more fraud—a lesson that was supposed to be learned from the 2009 financial meltdown. However, unlike Iceland, which threw its bad bankers into prison for their misdeeds, the United States chose to bail out its big lenders, the ones running MISMO, instead. They were considered “too big to fail.” 

What this means for consumers is that noxious predatory practices will continue, most noxiously the bait-and-switch, where rates and fees are increased at closing, when most consumers feel they cannot back out or demand corrections. But there will also be misleading teaser rates; collusion between appraisers, bankers, and investors to inflate profits; the falsification of income records to qualify consumers for larger mortgages than they need or can afford, and inflating of appraisals to sell more and larger mortgages.

The net-net is that periodic dips in mortgage rates may actually increase costs, even as consumers are told that they’re getting a once-in-a-lifetime deal. When home prices only go up, it’s easier for consumers to play along. But, as Warren Buffett has admonished, it’s only when the tide goes out that you learn who’s naked. Buffett happens to be a major shareholder of several banks, including Bank of America. Let’s hope that he convinces management that they should want a fair and sustainable mortgage industry—just like their customers. 
About the author: Yatin Karnik is the CEO and co-founder of Confer, Inc and the former senior vice president of Wells Fargo Mortgage