New Loan Eliminates 'Junk Fees' but May Not Save You Money
There is much to admire in Bank of America's new "no-fee mortgage plus" program for home buyers, but there also are some shortcomings.
The program collapses all lender fees into one combination of interest rate and points, eliminating myriad lender "junk fees," which often confuse shoppers. Junk fees are also a source of abuse by less scrupulous lenders who require them at the last minute.
Bank of America is not unique in eliminating these fees and committing to a single guaranteed fee. It is, however, the largest lender to do so, and perhaps that will induce other large players to follow.
An even more impressive feature of the mortgage is its absorption of all private third-party charges, including title insurance, mortgage insurance, appraisal costs and credit report. Bank of America includes third-party costs, as well as its own costs, in its rate and points.
The only other lender that does this is ABN Amro, but Bank of America goes a step further in absorbing mortgage insurance charges on loans with down payments of less than 20 percent. ABN Amro passes the cost of mortgage insurance to the borrower, as do all other lenders. In addition, although both firms absorb the cost of lender title insurance policies, Bank of America also pays for the buyer's title policy.
Of course, these loans aren't necessarily bargains, a point I'll return to below. But if Bank of America's example is followed by other lenders or if it emboldens legislators to require similar programs from all lenders, which I have long advocated, its importance cannot be over-emphasized.
Under existing arrangements whereby borrowers pay the third-party fees, lenders have had no incentive to use their buying power to lower the fees. But once lenders are on the hook for these charges while competing with one another for loans, they will use their superior information and buying power to drive down prices. The incremental cost of third-party services included in the lender's price will be much lower than the prices borrowers now pay when purchasing them separately.
Is the new Bank of America program a good deal for borrowers now? Unfortunately, the answer is far from clear. The only effective way to shop one lender against another is online, and Bank of America makes this difficult.
Its Web site is designed to induce you to call the bank, not shop it. To find prices, you have to learn that the "calculator" button provides the path, which takes some doing. When you get there, you find that the bank has narrowed your selection to three combinations of interest rate and points for each of seven programs. (Good Web sites offer as many as 10 times that number.) This winnowing of choices might be acceptable, even desirable, if it were based on relevant borrower characteristics, such as tax bracket or expected period in the house, but it isn't.
Further, you can't shop adjustable-rate mortgages with confidence because the site does not disclose the index, margin, rate caps or maximum rate -- all key information. And borrowers who cannot provide full documentation or whose credit is not "good" can't price their loans on the Bank of America site because the site does not adjust prices for these factors.
I worked within these limitations to compare Bank of America's prices with those of another lender that promises guaranteed fee disclosure and provides a wide range of rates on its Web site. That allowed me to find matches for the few rates shown by Bank of America. I selected common interest rates and compared Bank of America's points to the sum of lender fees and third-party fees at the other lender.
The results were mixed. In the 11 comparisons I did, Bank of America's prices were lower in five and higher in six.
The bottom line is that Bank of America's inclusion of all lender and third-party fees in a single price does not necessarily mean that its price is lower than those of its competitors. It all depends on the market niche in which the borrower falls, and Bank of America's price in many, if not most, niches can't be shopped online.
The bank's loan officers still have the right to charge an overage -- a price higher than the price posted by the company. Overages and price secrecy are vestiges of the bazaar culture that has long dominated mortgage banking. Bank of America has taken a big step away from the bazaar, but it still has a way to go.
In my column last week on why some unaffordable loans are good, I described the case of a widow with a $2 million house who took a mortgage for $1 million at 8 percent, invested the proceeds at 5 percent and had a net monthly cash inflow of more than $12,000. Numerous readers pointed out to me that this was impossible, and they are right.
What I meant, but neglected, to say was that she bought a fixed-payout annuity on which the payment over 5 years included the repayment of her $1 million. Another way to express this is to say that she is repaying the $1 million to the mortgage lender over 30 years but the insurance company is repaying $1 million to her over 5 years.