I just reached a contract to purchase a home. In doing so, I had a chance to survey loans from about 10 lenders. While there is no change in the homogeneity of interest rate pricing, I was surprised to see incredible variations in origination fees.
About the deal: I bought a home with the intention to utilize it as an investor property. It is a modest brick three-bedroom in a quiet neighborhood. I got a distress price, in my mind, because it was being sold by two heirs that needed their money quickly. The house itself is in fine shape. It won't require a 203 loan. The home cost $83,000 after the sellers threw in $2,000 for closing costs. Was it a distressed price? Well, I believe so. The county assessment, conducted in May 2008,
came in above $145K.
Current loan terms
It was a given that I had to put down 20 percent. I decided to put down 25 percent. The banks were firm, across the board, on the basic terms of the loan: my loan-to-value needed to be below 80 percent, and I had to have good credit. Lenders are not dealing with people below 720 at all. Without being too specific, let's just say that I could meet those requirements.
Most of the banks had the standard 1 percent origination fee. That was the case with all of the big banks that I surveyed, saved for Wells Fargo. Wells wanted 1.875 percent.
Two banks had origination fees above 2.5 percent. One had a 3 percent origination fee. In both cases, the origination fees were not complemented by discount points. The interest rates were accordingly lower - about 62 basis points. I see the lack of discount points as a logical explanation for the origination fees, but at the same time, they were not offering a product without the high origination fee.
The upshot of that is that it seems like these banks (Southern Community and Capital) are going to make very few loans. One of these banks tells its customers that it is "small enough to care." That's fine, if a person is supposed to take a slogan as fluff.
I called Capital to ask them about the situation. One of their officers told me that the origination fees are not that high. So, I double-checked. Fill out the seven-stage application, and the computer spits out the 2.5 percent fee. Go figure. Maybe they're treating online differently than in-person.
I cannot see how these policies are going to allow banks to make many mortgage loans. Right now, it is a first-time homebuyer's market. Those kind of fees are going to turn away borrowers without a lot of cash to put down. I have also got to believe that these policies are going to crimp their ability to serve low-and-moderate income borrowers. I will watch how these banks do on the CRA exams. I suspect that they are not going to do very well, but that their regulators will not hold them accountable for their underperformance.