Lender Competition Means Lower Mortgage Closing Costs

Competition among lenders has been good for U.S. homebuyers.

The average mortgage-origination fee fell 22 percent in the 12 months through June to $1,041 as nontraditional lenders gave borrowers more options, pushing banks to make concessions to stay competitive, according to an annual survey by Bankrate Inc. Charges are declining even as banks struggle with costly regulations spurred by the 2008 financial crisis, said Greg McBride, Bankrate’s chief financial analyst.

“The new players entering the market are forcing established lenders to cut fees even though compliance costs for everyone are going higher,” McBride said in an interview. “Lending standards haven’t changed much, so this is really the only way they can compete.”

Origination fees charged by lenders to process mortgages declined from a year earlier in every state. Average costs ranged from $874 in Wyoming to $1,208 in Arizona, according to Bankrate’s survey, released this week. The average was $1,181 in New Jersey, $1,032 in New York, $937 in California and $905 in Massachusetts.

When Bankrate added in third-party costs, such as for appraisals and title searches, Hawaii ranked first, at $2,163, followed by New Jersey, at $2,094, and Connecticut, at $2,033.

Bigger Share

Financial firms that aren’t traditional banks accounted for 55 percent of mortgage lending in June, double their share at the end of 2012, according to Stephen Oliner, a resident scholar at the American Enterprise Institute in Washington and a former senior adviser to the Federal Reserve Board. Such companies include online firms, peer-to-peer lenders and closely held originators such as Quicken Loans Inc.

In 2006, the height of the housing boom, the nonbank share was 30 percent, Goldman Sachs Group Inc. reported in March. Nonbanks dominated the market for subprime mortgages, the risky loans that triggered the financial crisis, Oliner said.

The smaller lenders have lower overhead than traditional banks because they don’t have to pay for brick-and-mortar branches, and they aren’t encumbered with legacy costs from the mortgage meltdown, Oliner said.

“Competition from nonbanks is saving borrowers some money, and that’s great, but it also comes with risk,” he said. “These are not companies with deep pockets, so when the next recession hits and some people stop paying their mortgages, the taxpayers will be on the hook.”

Lower Profits

Mortgage-lending costs have soared as regulators implemented more than 1,800 pages of new rules stemming from the 2010 Dodd-Frank Act in the aftermath of the financial crisis. In this year’s first quarter, banks reported a profit of $1,447 per loan, down from $1,654 in the same period of 2012, according to the Mortgage Bankers Association.

Mortgage-banking revenue at Wells Fargo & Co., the largest U.S. lender, dropped 1 percent in the second quarter from a year earlier, even as originations gained 32 percent. JPMorgan Chase & Co. booked a 39 percent drop in mortgage revenue, which includes the making and servicing of home loans, while lending for the period jumped 74 percent.

Spokesmen for both banks declined to comment on their origination fees. The Bankrate report didn’t break down costs by lender.

Having nonbanks in the mix doesn’t guarantee consumers will get a bargain, said Bankrate’s McBride. About half of borrowers don’t shop around before filling out a mortgage application, according to the Consumer Financial Protection Bureau in Washington, which regulates nonbanks.

“The average closing cost is down, but that doesn’t mean everyone has cut fees,” McBride said. “Some lenders just aren’t competitive, and you don’t know that until you look around.”

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