Transcription:
Bonnie Sinnock (00:23):
This is Bonnie Sinnock, Capital Markets Editor at National Mortgage News. Welcome to our series on getting people into affordable homes and loans. In our last installment, you heard from my colleague, reporter Spencer Lee, about the search for new solutions to housing supply woes. In today's episode, we explore how lenders can chart the right course to a cost-effective digital closing.
"Closing costs are a set of fees that are charged to the borrower. When a mortgage is finalized for purchase mortgages, we know that excessive closing costs can drain a down payment and for refinances, closing costs also have high stakes."
That's what Rohit Chopra, director of the Consumer Financial Protection Bureau said recently in a speech addressing the importance of closing costs as an under-recognized hurdle to home ownership at an Intercontinental Exchange-National Housing Conference event. His focus on this highlights the fact that while people shopping for affordable homes think a lot about things like interest rates and down payments, they don't always consider the costs associated with closing. These can be particularly tough to manage when supply issues rule out seller concessions. As this top producing mortgage originator explains.
Matt Weaver (01:37):
My name is Matt Weaver and I'm a loan originator with CrossCountry Mortgage. I operate out of Boca Raton, Florida, and have been originating for 27 years.
When we are in a more of a buyer's market, closing cost concessions are really a viable option because it allows the seller to give that buyer an incentive as to why they would buy their home over a competing home for sale. When we are in a multiple offer environment such as 2020 or 2021, closing cost concessions are not an option because you have anywhere between five 10, sometimes upwards of 15 offers on any one given listing for sale. Homebuyers today really need to pay attention to the inventory levels in their local market.
Bonnie Sinnock (02:25):
Closing costs include not only the fees Chopra mentioned, but any expenses that might arise in the process involved. This makes an efficient customer experience valuable to both lenders and borrowers. As this mortgage broker explains.
Tiana Uribe (02:40):
I'm Tiana Uribe. I am a mortgage broker and real estate broker here in San Diego, sunny San Diego, California. I'm affiliated through mortgage lending through C2 Financial.
In a market like this, where it's highly competitive because of a housing shortage as well as higher interest rates means, there are less borrowers and buyers out there and you've got more competition between lenders. So it is important for our system and our processes to be honest, be transparent. Explain to the borrower that their closing costs are going to be somewhere between one and 3%. Do they have that available? Where is that coming from?
Bonnie Sinnock (03:18):
While closing costs seem small compared to the overall mortgage, they can add thousands of additional dollars to the cost of a home and can bar borrowers who have been able to locate otherwise affordable housing in a tight market from getting financing. So as much as finding a home at the right price point can require some outside-the-box thinking, so too can finding ways to bring closing costs down. A story Uribe tells about a recent customer illustrates the point.
Tiana Uribe (03:45):
We recently had a borrower who was looking to purchase, who was shopping around, which makes sense. They went to their bank first. I'm a wholesale lender, so I'm on the wholesale side of things. They came to us and they said, we just don't think that we're going to be able to afford to buy. We don't have a way to finance these costs with the lender. So that was something that, fortunately, on the wholesale side, we were able to look at and actually manage to help them with.
Bonnie Sinnock (04:12):
However, simply financing the costs involved is not always the answer, as this mortgage banker explains.
Melissa Cohn (04:18):
My name is Melissa Cohn and I'm the regional vice president of mortgages at William Raveis Mortgage. I've been a mortgage banker for over 42 years, and it all depends on how much longer do you think you're going to stay in the house? How great were the savings that you're getting on this new mortgage? Some people will want to finance it if they have a lot of built up equity that wasn't money that they paid, but just through the appreciation of the property since they purchased it, they may say, "Hey, I'm going to use my newfound equity to pay for my closing costs." Really, it's a question of doing the math. You have to figure out which way works best for you. Now, you don't want to take all of your cash to pay your closing costs and find yourself in a position where you've had very little liquidity there and that kind of situation. You're probably best off trying to finance your closing costs if you have plenty of liquidity and you can pay cash for the closing costs. In that case, the answer is yes, it's probably the most prudent route because you're not paying interest on the closing costs.
Bonnie Sinnock (05:21):
That example is only the tip of the iceberg when it comes to the complexity that makes controlling costs in the closing process today challenging. In the full closing process, there are a lot of moving parts that generate costs, according to one expert who helps lenders manage digital applications and outsource mortgage processing.
I talked to Rajul Sood, who is the managing director and global head of banking at Acuity Knowledge Partners, managing over 3,000 people across different offices within Acuity. She has, overall, 22 years of experience in financial services.
She says, "Mortgage closing costs, from what I've seen, involve a very complex process with strict deadlines and a lot of penalties for errors. It requires a significant amount of documentation. It's also an important space to apply innovation, technology and cost-effective third party solutions to in order to reduce the overall cost of processing for the lenders, which in turn have a cost impact on the borrowers as well."
One area where technology can be applied is to a required disclosure process for fees paid to multiple third party providers for things like appraisals and credit checks in the closing process.
Valerie Saunders, chief executive strategist at the National Association of Mortgage Brokers explains the role these disclosures play
Valerie Saunders (06:41):
Every lender has certain static fees that are required, whether they call it underwriting fees or administrative fees. We know what those are in advance and can extend those out to provide a consumer with a loan estimate. The ultimate goal is to get as close as you possibly can to what their final numbers are going to be, barring any unexpected or unanticipated costs.
Bonnie Sinnock (07:14):
If certain fees come in outside specified tolerances, lenders have to make up the difference. An expert at Intercontinental Exchange explains.
Leah Strommer (07:23):
My name is Leah Strommer and I am the product director for ICE Fee Solutions. TRID, often referred to as Know Before You Owe, is an acronym that stands for the TILA RESPA Integrated Disclosures, and that, combines the Truth in Lending Act, really pushing in the Real Estate Settlement Procedures Act, or RESPA. These policies combined require that every lender disclose any fees through two different documents. One is the loan estimate and the other is the closing disclosure. And if there is a fee change from the time the loan officer quotes it in the loan estimate to the time that it is documented or released in the closing disclosure, there is a certain tolerance level. So transfer taxes, for example, have zero tolerance, which means that if the transfer tax is different from the time the loan estimate goes out to the time it's stated on the closing disclosure and that change was not caught and placed in the closing disclosure, then the lender has to incur the difference, and that's really can turn out to be a lot of money.
Bonnie Sinnock (08:37):
To give you a sense of how these can add up, consider that out of nearly 90,000 loans ICE's mortgage division looked at in a recent study, 31,000 had transfer tax changes. The cures for these and associated expenses cost on average $1,225 per loan. Digital mortgage strategies can be applied to address the concern according to Strommer. Automation can make communicating fee changes more efficient, which can ensure mortgage companies meet their TRID deadlines and avoid costly penalties.
Leah Strommer (09:11):
That's what's going to help them get to the closing desk faster. That's what's going to give the new homebuyer the best possible experience that he can have, so we're limited with how we automate data itself. Once we get the data, the automation comes in, saving the manual steps for the loan officer so they can pivot and make adjustments between the estimate and the closing disclosure in a way that's going to meet TRID compliance.
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Bonnie Sinnock (10:00):
The Mortgage Bankers Association recently authored a white paper suggesting that TRID and other aspects of 50-year-old RESPA requirements should be repealed or modernized in ways that could change this dynamic. But at the time of production for this podcast, there was little sign there would be change. Some closing costs could become more negotiable in the future. There's been some experimentation with title insurance alternatives to bring costs down. As with some appraisal substitutes, title insurance alternatives could be used in some circumstances where they are adequate for the risk. However, there are questions about alternatives like opinion letters. Those can be based on an attorney's title searches with errors and omission insurance applied, but some wonder if they can adequately cover the risk to the extent that title insurance does. Some lenders like United Wholesale Mortgage allow title insurance alternatives, but they're not in widespread use. One possible middle ground is to use a scoring model to determine what the level of lien risk is on a particular property and then decide whether a title insurance alternative is acceptable based on that.
Bonnie Sinnock (11:05):
More can be done by automating the full closing process, but this is challenging because it has a lot of variables. There are multiple vendors handling the various loan services. Also, the type of housing involved can be a factor. Closing costs for something like a condominium can differ from those for a traditional single-family home. The closing process itself is subject to a variety of jurisdictional rules. So while automated methods such as remote notarization have gained traction in more areas since the pandemic, costs can still vary by region because there is some variation in the extent to which a transaction can be automated because of jurisdictional differences. A lot of companies have engaged in hybrid quasi-manual processes that accommodate a broad range of rule sets.
The closing is among the most challenging parts of the origination process to manage cost effectively through digital mortgage strategies. But mortgage companies that can are using it as a competitive edge. Some lenders that can control their expenses with automation might feel comfortable offering flat fees for certain closing costs.
United Wholesale Mortgage has advertised this. Others have offered guaranteed closing times. JP Morgan Chase's banking unit has marketed on-time closings for some loan types, promising a $5,000 payment if a deadline gets breached.
Lenders sometimes offer closing incentives in conjunction with higher rates to cover their costs, but doing so can undermine the attractions of the savings to the borrower. So using an efficient process to lower costs for this purpose has more benefits. A fast error-free closing can make it easier to compete for a property. It can also prevent the closing from exceeding the rate lock expiration period. If that occurs, a borrower typically either pays a fee to extend their current rate or adjust to the current one offered in the market. So avoiding the circumstance is a cost saver. Weaver explains
Matt Weaver (13:06):
Efficiency is critical, especially in the state of Florida. I'll use us as an example because our closing timeframes are very quick here. Some states have a longer closing periods, such as New York. ... In the state of Florida, it's not unusual to close a transaction in 15 days, in 21 days, in 25 days, etc. Some with our process take advantage of a 10 day closing, and the reason why that type of efficiency is used or that type of speed, I should say, is used in our markets, is it's designed to either a eliminate buyer competition, which we're seeing less of, but multiple offers still exist. And also that type of speed is used to get perhaps a better price or better terms because if you can buy a home and take it off the hands of a seller in 10 or 15 days, that's appetizing to a seller.
Bonnie Sinnock (14:05):
Given that natural disaster risk has spread even to areas not typically associated with it recently, and data security issues have become more prevalent, companies automating the closing cost process also should consider how they can address concerns in these areas too, because a property value can be affected by a disaster when one occurs. There can be new requirements for closing, like a re-examination of the property's value. Some closing technology providers offer identity verification and fraud prevention technology. California has natural hazard disclosures that must be issued by sellers in the real estate transaction through a process that automation can help with. Some insurance costs or availability challenges associated with disaster risks affect closings too, and these need to be considered in trying to provide an efficient process, according to Uribe.
Tiana Uribe (14:59):
Insurance has been something we now have on our process to look at from the very beginning, and it used to be that we would consider insurance only with condos to make sure that we could get complete walls-in insurance, but now single family residents, especially with rezoning and such, that's become more complex, so we don't want to wait until the end to have that be another caveat thrown at a borrower or a buyer that they can't obtain insurance based on a certain location.
Bonnie Sinnock (15:29):
Overall, while providing a smooth and cost-effective process can be a challenge during closing, given that there remains some hurdles to fully automating it, there are a lot more efficiencies that can be tapped in closing now than there were in the past, according to Weaver.
Matt Weaver (15:45):
Can it seem arduous? Can it seem that there's one too many pieces of paper that have to be signed? I'm sure on behalf of the homebuyer, yes, it seems like there are a lot of documents that have to be signed. There's an e-sign here, an e-sign there, and the next thing you know you keep getting hit with all these documents. At least that's what maybe some of them perceive, but as far as the actual costs, it's pretty efficient.
Bonnie Sinnock (16:13):
Thanks for listening to the second installment of the National Mortgage News Series on getting people into affordable homes and loans. If you haven't heard it already, please go back and listen to our first installment on the search for new solutions to housing supply woes. Visit us at www.nationalmortgagenews.com for daily updates on housing finance news.