Closing costs connected to ups, downs of lending fees

As a rule, people buy or sell very few homes in their lives, and those buyer/seller transactions tend to take place over time with big gaps in between. So while real estate agents, mortgage lenders and title companies stay up on what happens at a closing, consumers must re-educate themselves each time on the meaning and appropriate charges associated with closing and settlement.

In some parts of the lending environment, “junk” fees boost closing costs; other fees such as title insurance tend to go up on a yearly basis. And while some fees in the state remain fairly consistent throughout, other fees vary by market and rise and fall according to what the market will bear.

“A lot of fees are tied to the size of the loan,´ said Matt McCartney, senior residential mortgage lender at First National Bank in Fort Collins. “Other fees depend on location. I do a lot of lending in the Fort Collins area. Here a typical closing fee would be $150, while in Denver it would run $300. Title insurance might be $300 in Larimer County, but $500 in Denver.”

SPONSORED CONTENT

How Platte River Power Authority is accelerating its energy transition

Platte River Power Authority, the community-owned wholesale electricity provider for Northern Colorado, has a history of bold initiatives.

McCartney noted that in general, homes in Denver are more expensive than homes in Northern Colorado and so the market allows for higher fees.

“If you were able to find a lower cost home in Denver, you would still be stuck with the higher title fees,” he said.

Title insurance fees

Title insurance fees are at the center of any real estate transaction. Until the seller can prove ownership of the property and the title is good and marketable, the buyer cannot get a mortgage. It is the responsibility of the title company to make sure that there are no “strange claims” on the property and then to ensure that the title is clear.

The seller pays the premium and the title company has to pay up if a claim against the property appears later. The question is, with all the quick-search technology available to a title company, just how much time and risk are actually involved?

In a Feb. 14 story in Money magazine, staff writer Stephen Gandel noted that since 1995 “title insurers have on average spent less than 5 percent of their revenue on claims” compared to property and casualty insurers that “typically pay out 80 percent of their premiums to cover policyholders’ losses.”

Gandel suggested that consumers were overpaying for title insurance because instead of shopping around for the best price, they took the advice of other parties in the transaction.

It may be true that in some parts of the country there is enough unevenness in title insurance fees to justify shopping for the best price. In Colorado, however, variability exists between markets, not within markets. There are plenty of title companies to choose from, and the rates tend to be competitive.

“Title checks in Denver are a lot more complicated than they are in Northern Colorado,´ said Peggy Sage, assistant vice president in charge of the mortgage department at Home State Bank in Loveland. “Lenders require more riders, and so the fees will reflect that complexity. Increases in one part of the market get spread out over the whole market, pro rata.”

Some of the extra endorsements a lender might require include a condo endorsement, a planned unit development endorsement and an environmental endorsement.

“There may be other endorsements that relate to mineral rights,” Sage said, “but each one adds to the cost of the title insurance, and more are required in the Denver market than in Weld and Larimer counties.”

Although title companies are highly regulated, in the past year some in Colorado came under serious scrutiny for what looked like kickbacks for referrals. Colorado’s insurance division investigated nine title insurers for schemes that resulted in higher charges to consumers.

More problematic than the charges was that the scheme left “thousands of Colorado homeowners without valid title insurance,” according to an American Land Title Association newsletter. The “alleged kickback schemes involved sham affiliated business arrangements, or ABAs.” These arrangements among real estate providers are legal under the Real Estate Settlement Procedures Act, but must be fully transparent.

“The title insurance industry is well regulated,” Sage said. “It is a service industry. What we look for is speed and accuracy as we make recommendations.”

Comfort level important

McCartney added that a comfort level with a particular title company also factors into making a recommendation.

“There are nine loan officers in this office,” he said. “Each one might refer a different title company. It comes down to relationships.”

It certainly does appear that the title insurance business is a good business to be in; in 2001 there were 211 title insurance companies registered with Colorado’s Division of Insurance; in 2004, there were about 525, according to ALTA. And the fees associated with the policy in Colorado are about as negotiable as the price of gas.

It appears that their variability, and thus the variability in legitimate closing costs in Colorado, follows the price of real estate and the demands of lenders for multiple endorsements in complicated markets.

As for the disparities in closing costs linked to “junk fees” and misleading “good faith estimates”, those differences follow the fault lines of greed and gullibility.

“If by the time you get to the closing table something has changed in the good faith estimate that leaves you $5,000 short, stand firm,´ said Sage. “Do not be afraid to question charges and fees that weren’t there before.”

Considering the number of real estate transactions that successfully reach completion every day, the odds are on the side of the closing’s coming out close to projections. Glenn Mueller, director of the Everitt Real Estate Center at Colorado State University, suggests that one-time costs at closing are of less long-term concern to buyers than property taxes, which will come every year.