Anyone who has applied for a mortgage refinance lately in order to capture lower mortgage rates can testify to the fact that mortgage fees have increased. That often defeats the whole purpose of doing a mortgage refinance in the first place, and is helping to prolong the real estate crisis.

The government has spent billions of dollars in an effort to strengthen banks, while the Treasury has cut interest rates to the bone. As mortgage rates have finally started to fall, people are encouraged by the prospect of doing a mortgage refinance to get out from under burdensome loans with unwieldy monthly payments. But even as mortgage refinance applications have gone up, so, too, have mortgage fees. Paying higher mortgage fees is a significant impediment to borrowers, so despite great rates, the typical homeowner derives no net benefit.

Lower mortgage rates; no mortgage refinance

The average rate on a 30-year fixed-rate mortgage dropped below the 5 percent level at the end of February. That should have inspired a wave of mortgage and refinance applications. But the Mortgage Bankers Association reports that, despite cheap mortgage rates, the percentage of mortgage applications that reach a successful closing is in a downward trend. Most homeowners already know that if they've tried to refinance. They also know that the main culprit is the two-edged sword of stricter underwriting guidelines plus prohibitively expensive mortgage fees.

Mortgage fee problems

Fees are typically tied to risk factors, so borrowers with higher credit scores get preferential treatment in the form of lower closing costs. But lately, the way that FICO scores are interpreted has changed. What used to be considered a stellar score may now only qualify as mediocre. In 2009, for instance, a credit score of 700-which used to be considered golden-is currently translating into a status that used to be reserved for those who only had a score of 660. That's because lenders have become more vigilant, and in an extreme reaction to their previous approach that was too lax and carefree, they now lend only to a rare few who pass muster. As evidence of this trend, the trade publication Inside Mortgage Finance reported that the average FICO score on mortgages bought by Freddie Mac and Fannie Mae rose to 747.5 in the fourth quarter of last year, up from 722.3 in 2005.

A score of 660 used to buy a loan with no upfront fees, for example, whereas now, a fee of nearly 3 percent will likely be charged. That adds more than $5,500 to the typical $200,000 mortgage. Trying to buy down the mortgage rate by paying points only adds to the tally of expenses, so that's not a practical solution. Even as household income falls, unemployment spikes, and home equities sink, the cost to do a mortgage refinance is rising substantially. Because of the overall costs and restrictions involved, homeowners who want to snag low mortgage rates as a way out of their financial problems are unable to do so.

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Published on April 14, 2009