Mortgage closing fees are in the hot seat. Here’s why the feds are looking into them.

The Federal Bureau of Consumer Protection last week released an investigation into what the agency calls “unwanted fees on mortgage closing costs.” These additional fees, involving home appraisal, title insurance and other services, have increased in recent years and can add thousands of dollars to the final cost of purchasing a home.

Here’s a deeper dive into the additional mortgage fees buyers pay before getting the keys to their new home and why five types of charges in particular are being looked at by the CFPB.

What are junk mortgage fees?

According to the CFPBJunk rates are those that “far exceed the marginal cost of the service they are intended to cover”.

Although mortgage companies may charge more than a home buyer 200 different fees to close on a property, the CFPB is particularly interested in five types of fees and services that have seen price spikes in recent years, an agency official told CBS MoneyWatch. They include discount points, credit report fees, home appraisal fees, and title insurance.

Discount Points: Also known as “mortgage points,” discount points are upfront fees that homebuyers pay to reduce the interest rate on their home loan. Mortgage companies pocket the repo fee, as it is also sometimes called.

Credit Report Fees: As the name suggests, credit report fees are what home lenders charge buyers for running a borrower’s credit report. These fees go to the three main credit reporting agencies – Equifax, Experian or TransUnion.

Home Appraisal Fees: Also known as property appraisal fees, these are fees that lenders charge homebuyers to have a private appraiser visit the property being purchased and place a fair market value on the home.

Title insurance fee: Mortgage companies also charge homebuyers for obtaining a title insurance policy, which covers the lender should there be a guarantee on the property once a title search is performed.

Mortgage Origination Fee: Typically between 0.5% and 1% of the cost of the home itself, the mortgage origination fee is what a lender charges a buyer to initiate a new home loan application.

Why have these rates increased in recent years?

For the most part, home appraisal and credit report rates have increased due to rising inflation and rising labor costs, an expert told CBS MoneyWatch, but mortgage origination rates are a different story.

“Some of them are set as a percentage of the transaction price of the home,” said Susan Wachter, a real estate professor at the University of Pennsylvania who studies housing finance. “When housing prices risethe same goes for fees.”

Wachter said now is a good time for the CFPB to look into what is causing closing rates to rise, but emphasized that many of the services and fees are essential to the home buying process.

What is the government’s concern about mortgage junk fees?

The CFPB is concerned that undue fees may be harming buyers’ ability to make a reasonable down payment on their home. Excessively high closing fees can also cause buyers to fall behind on mortgage payments, officials believe.

The typical homebuyer paid about $6,000 in loan closing costs in 2021 – an amount that included paying discount points, title insurance, appraisal, credit report and other fees, according to to the CFPB. This represents an increase from $4,889 in 2021.

The agency is investigating whether mortgage rates have risen too high, along with possible solutions such as new regulation to lower them, eliminating certain fees altogether or having the fees paid by someone other than the home buyer, the official told CBS MoneyWatch. For now, the CFPB has asked homebuyers to to share stories of how much they paid after closing on a house. This information will be used to determine the agency’s next step.

How are expensive mortgage rates affecting home ownership?

The U.S. homeownership rate fell from 66% in 2023 to 65.6% in the first quarter of 2024. The two biggest obstacles to increasing homeownership rates are the lack of affordable properties and the inability of buyers to save for a down payment, according to to look for of the National Association of Realtors. Excessive mortgage rates compound these obstacles by eroding homebuyers’ purchasing power.

Unwanted fees keep financially struggling would-be homebuyers on the sidelines, according to Wachter. In most areas of the country, it is It is cheaper to rent a house than to buy and “that’s because of the advances and those fees,” she said.

“Becoming a homeowner is a scary thing,” Wachter said. “And rents are also high, so for young adults who live with their parents or friends, [obtaining homeownership] It’s much harder for them than it is for their older siblings or their parents.”

What do banks and lenders have to say about excessive closing fees?

The Mortgage Bankers Association (MBA), the trade group that covers real estate financing, said there isn’t much lenders can do to reduce or eliminate mortgage closing fees because the services they cover are legally required.

“Many of these disclosed costs, such as title, appraisal, and credit reports, are required by federal statutes, safety and soundness guidelines, and the Federal Housing Administration, Department of Veterans Affairs, and Fannie Mae and Freddie Mac as a condition of purchase and insurance a mortgage,” the association said in a declaration last week. “Additionally, the services these fees cover mitigate risk for both taxpayers and borrowers.”

MBA said lenders worked with the CFPB a decade ago to ensure mortgage rates were clearly defined for buyers on mortgage disclosure forms. The rules governing the mortgage process fall under the Dodd-Frank Act of 2010. If the CFPB wants to make changes, amending the Dodd-Frank Act “is the only appropriate vehicle to begin that work,” MBA said.