There is much to admire in Bank of America’s new No Fee Mortgage Plus (NFMP) program for home purchasers. NFMP collapses all lender fees into one combination of interest rate and points, eliminating the myriad of separate lender “junk fees” that confuse shoppers. Junk fees are also a source of abuse by less scrupulous lenders who may raise them at the 11th hour.
BofA is not unique in eliminating junk fees. Upfront Mortgage Lenders (UMLs — there are now four listed on my Web site) also commit to a single guaranteed fee, as does ABN AMRO. But BofA is the largest, and hopefully it will induce other large players to follow suit.
An even more impressive feature of NFMP is its absorption of all private third-party charges, including title insurance, mortgage insurance, appraisal costs and credit report. BofA 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 BofA goes a step further in absorbing mortgage insurance charges on loans with down payments of less than 20 percent. AMRO passes the cost of mortgage insurance to the borrower, as do all other lenders. In addition, while both firms absorb the cost of lender title insurance policies, BofA also pays for the buyer’s title policy.
Of course, BofA must cover third-party costs in its own single fee, so NFMP loans aren’t necessarily bargains, a point I’ll return to below. But if BofA’s example is followed by other lenders or if it emboldens legislators to mandate it for all lenders, which I have long advocated, its importance cannot be overemphasized.
Under existing arrangements where borrowers pay the third-party fees, lenders have had no incentive to use their buying power to lower them. But once lenders are on the hook for these charges while competing with each other 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.
But all that is (hopefully) in the future. Is the NFMP a good deal for borrowers right now? Unfortunately, the answer is far from clear. The only way to shop one lender against another effectively is online, and BofA makes this very difficult.
Their Web site is designed to induce you to call them, not shop them. 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 BofA has narrowed your selection to only 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 down of choices might be acceptable, even desirable, if it were based on relevant borrower characteristics, such as their expected period in the house or their tax bracket, but it isn’t.
Further, you can’t shop adjustable-rate mortgages (ARMs) with confidence because the site does not disclose the index, margin, rate caps or maximum rate. And borrowers who cannot provide full documentation or whose credit is not “good” can’t price their loans on the BofA site because the site does not adjust prices for these factors.
I worked within these limitations to compare BofA’s prices with those of a UML, which discloses a very wide range of rates that allowed me to find matches for the few rates shown by BofA. In the comparisons, I selected common interest rates and compared the BofA points to the sum of lender fees and third-party fees at the UML.
The results were mixed. In the 11 comparisons I did, BofA’s prices were lower in five and higher in six.
The bottom line is that BofA’s inclusion of all lender junk fees and third-party fees into a single price does not necessarily mean that a BofA price is lower than that of its competitors. It all depends on the particular market niche in which the borrower falls, and BofA’s price in many if not most niches can’t be shopped online.
BofA’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. BofA has taken a big step away from the bazaar, but it still has a way to go.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
