Mortgage Lenders See Immense Value in Simplifying and Standardizing Closing-Cost Descriptions

Closing costs are fees and charges paid by borrowers in connection with the closing of a home purchase or a mortgage refinancing.¹ Examples include mortgage origination fees, borrower credit report fees, appraisal fees, title insurance premiums, settlement fees, and real estate agent commissions. In recent years, these costs have risen considerably,² posing a significant challenge for many first-time and lower-income homebuyers hoping to purchase a home.³

In late July, we surveyed over 200 senior mortgage executives via our Mortgage Lender Sentiment Survey® to gather insights from lenders about opportunities to simplify and standardize closing cost line-item descriptions, as well as their opinions on which cost areas would benefit from clearer definitions to increase transparency for borrowers. Additionally, we asked lenders to provide feedback on areas where they believe costs can be reduced.

Among the key findings:

• While 60% of lenders believe it's easy to accurately estimate closing costs, their experience explaining these costs to borrowers is mixed: Only half of lenders told us that it's easy to explain closing costs to borrowers.
• The majority of lenders (81%) agreed that simplifying and standardizing closing cost line-item descriptions would be valuable for the mortgage industry. Respondents indicated that increasing transparency, particularly for borrowers, would be the most important benefit of such an effort, followed by decreasing compliance costs, and helping consumers comparison-shop.

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• Lenders said "getting key players to align on standardization" is the biggest implementation challenge, followed by making the necessary technology updates (e.g., integrating with loan origination systems or industry data portals).
• To help improve transparency for borrowers, several closing cost types were highlighted by lenders as being especially likely to benefit from further clarity, including lender fees, settlement/closing fees, lender's title insurance premium or attorney opinion letter (AOL) fees, and borrower credit report and verification of income/employment/assets (VOI/E/A) fees.⁴

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• We asked lenders to identify the areas where they believe closing costs can be reduced, and the most common responses were borrower credit report and VOI/E/A fees⁵, lender's title insurance premium or AOL fees, and real estate agent commissions, in that order.

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As part of the survey, we also encouraged lenders to provide write-in commentary on the closing-cost concerns that are top of mind for them. Some lenders noted that certain costs charged by third parties, such as credit reports and employment verification fees, have climbed significantly, despite technological advancements intended to make the process more efficient and cost-effective. Others expressed the opinion that some closing costs were overpriced relative to the associated risk, while some observed that costs charged to borrowers can vary considerably, even for effectively the same service. A few lenders noted that while the individual fees charged by the transacting parties are often relatively low, when aggregated the closing costs typically add up to a significant amount. Finally, many lenders concluded that simplifying and standardizing closing cost line-item descriptions would be an important value-add for the entire mortgage industry, asserting that it would help increase transparency, reduce compliance costs, and enable consumers to both better understand the costs and shop around for better prices.

Based on these findings, we believe meaningful opportunities exist for the mortgage industry to increase transparency around closing costs and potentially help save consumers money. In recent years, the mortgage industry has made some strides in this space, including introducing tools to help borrowers better understand (and calculate for themselves) the various mortgage costs and fees, deploying property valuation modernization efforts to streamline the home-valuation process and reduce appraisal costs for borrowers, and allowing lenders to use an Attorney Opinion Letter (AOL) as an alternative to a lender's title insurance policy. Still, we believe much more can be done, and we're committed to working with our industry partners to help improve transparency and reduce closing costs for borrowers.

To learn more, read the full research deck.

Opinions, analyses, estimates, forecasts, beliefs, and other views of Fannie Mae's Economic & Strategic Research (ESR) Group or survey respondents included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR Group bases its opinions, analyses, estimates, forecasts, beliefs, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, beliefs, and other views published by the ESR Group represent the views of that group or survey respondents as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

¹ These fees are typically itemized under "Closing Cost Details" on the Closing Disclosure document. The Consumer Financial Protection Bureau's TILA-RESPA Integrated Disclosure (TRID) rule requires all settlement fees to be disclosed in the form of a Loan Estimate and the integrated Closing Disclosure. The objective of the Loan Estimate and Closing Disclosure documents is to simplify and clarify the terms of the loan that a borrower is applying for while also showing how much money is needed at closing and for what purpose.

² According to a CFPB analysis, from 2021 to 2023, median total loan costs for home mortgages increased by over 36%.

³ "Barriers to Entry: Closing Costs for First-Time and Low-Income Homebuyers," Fannie Mae, December 2021,
https://www.fanniemae.com/research-and-insights/publications/barriers-entry-closing-costs-first-time-and-low-income-homebuyers
https://www.fanniemae.com/media/document/pdf/barriers-entry-homebuyer-closing-costs

⁴ Larger lenders (37%) are significantly more likely than smaller lenders (15%) to cite "borrower credit report & VOI/E/A fees" as a top-two opportunity to increase transparency. Mortgage banks (34%) are significantly more likely than depository institutions (14%) and credit unions (16%) to cite "borrower credit report & VOI/E/A fees" as a top-two opportunity to increase transparency.

⁵ Larger lenders (56%) are significantly more likely than smaller lenders (36%) to cite “borrower credit report & VOI/E/A fees” as a top-two opportunity to reduce costs. Mortgage banks (53%) are significantly more likely than credit unions (29%) to cite “borrower credit report & VOI/E/A fees” as a top-two opportunity to reduce costs.