Rules limit closing-cost estimates

LOS ANGELES – Facing new penalties if they lowball estimates of upfront mortgage costs, lenders and brokers appear to be coming clean about how much borrowers will pay.

As a result, the so-called good-faith estimates that mortgage providers must give to prospective customers show closing costs soaring 36 percent this year, interest-rate tracker Bankrate.com said in a report this week.

The main reason for the increase, according to Bankrate: Lenders are giving more accurate estimates because they now must pay to cover the difference if they underestimate the costs, according to Bankrate.

In other words, the good-faith estimates are, well, being made in better faith.

Before Jan. 1, there was no penalty for giving bad estimates, so lenders battling for mortgage business had more of an incentive to give lowball quotes.

Lenders told Bankrate that actual closing costs rose modestly this year, in part because regulators and loan buyers Fannie Mae and Freddie Mac are requiring mortgage firms to do far more fact-checking than during the boom years.

Consumer advocates say the report demonstrates how lenders took advantage of lax regulation during the housing boom by often keeping borrowers in the dark about costs until they were faced with nasty surprises when their loans closed.

“Why is transparency such a challenge for them?” said Alan Fisher, executive director of the California Reinvestment Coalition.

According to Bankrate’s survey, which obtained online good-faith estimates for loans of $200,000, estimates of closing costs charged directly by lenders are up 23 percent from a year ago. Estimated charges for third parties such as appraisers and title insurers soared 47 percent.

California was among the highest-priced states in the survey.

The only states with higher fees than California were New York, with costs averaging $5,623, followed by Texas at $4,708 and Utah at $4,605.

Arkansas was the least expensive state, with costs averaging $3,007.

The most expensive component of closing costs was a title search and insurance to protect the lender from the possibility that title is not held free and clear.