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Saturday, January 31, 2009

Mr. President: Mortgage Costs Aren't the Problem

In his weekly radio address, President Obama announced that he will soon have sweeping reforms in our financial system. Included in those reforms is a plan to cut mortgage costs.

Soon my Treasury secretary, Tim Geithner, will announce a new strategy for reviving our financial system that gets credit flowing to businesses and families," Obama, a Democrat, said in his weekly radio and Internet address.

"We'll help lower mortgage costs and extend loans to small businesses so they can create jobs."

The cost of refinancing a mortgage is about $2000 and the cost of buying a property is a bit more than that. Being in the business, I know that often there a plenty of nonsensical costs that only line the pockets of those that pay them. Both processing and underwriting fees are unnecessary since both the bank and the mortgage company already make money on the loan. Often, the title fees are ballooned during a purchase in order to pay a greedy attorney.

That said, mortgage costs are not the problem right now, and they are certainly not such a problem that they need government action to combat them. The government can do all sorts of things to reduce mortgage costs. For instance, they can cap appraisal fees, title fees, underwriting, and processing fees. They can cap or eliminate points. All of these government actions would be devastating.

A typical appraisal could cost between $250-300. If the government capped it at $200, all they would do is drive appraisers out of business. Capping title fees would have the same effect. Capping underwriting and processing fees would only mean that banks and brokers would charge more elsewhere.

Often times, a mortgage broker lowers a borrowers mortgage rate through something called a discount point. If the government capped or eliminated up front points, this practice would also be eliminated. As such, where it would be used legitimately to lower a rate, such an action would now be against the law.

Furthermore, limiting title fees would also make financing larger homes more difficult. Title insurance is calculated based on the size of the mortgage. If title fees were capped, larger mortgages would no longer be cost effective for the title company.

Most importantly, if a borrower is unable to pay for the fees associated with a mortgage, are they really qualified to get one? During the explosion of the real estate boom, it was a common practice for the seller to pay for the buyer's costs in the loan. As such, since it was also popular to get no money down loans, buyers could literally buy a property with no out of pocket expenses. Is it really wise to allow people to buy property with no out of pocket expenses? Of course, this is now moot. FHA currently allows a maximum mortgage of 97%. That means buyers must come up with at least three percent down payment. Limiting mortgage costs won't help anyone come up with this three percent. Anyone that can ought to have enough money for the mortgage costs as well. If they don't, they shouldn't be buying a property to begin with.

A plan for the government to limit mortgage costs is not only ineffective but dangerous. The government shouldn't be the arbitor of what is or isn't a legitimate and reasonable cost. The market should be. Any government action that limits costs will only drive those costs to other places and drive people out of business.

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