William F. Galvin – ‘Still inexplicable’

Massachusetts Secretary of State William F. Galvin has accused lenders of pushing mortgage rates up and gouging consumers by packing on fees and causing long lines at the registries of deeds, which are facing a budget crunch.

Galvin made the remarks during a press conference the day after Christmas, in which he cited the Federal Reserve’s recent spate of reductions in short-term interest rates and the recent spike in 30-year mortgage rates as cause for an investigation by Congress and regulators.

The subject of the press conference centered on severe budget cuts that may cause shortfalls at the 13 registries under his jurisdiction. In addition to the cuts, staff now face unusually higher numbers of customers who want to close mortgages before rates go up again, he said.

But Daniel J. Forte, president of the Massachusetts Bankers Association, said it’s easy to misunderstand what effect the lowering of short-term rates would have.

It’s sometimes confusing to the general public when the Fed is lowering the overnight rate and prime rates. But obviously the longer-term rates are based on a number of variables which have more risk to them, said Forte.

Forte said that although long-term rates have increased slightly, they are still at historic lows. In fact, lowering the short-term rates can actually elevate long-term rates sometimes. These rates are really established by bond markets and security markets, said Forte.

Dean Caso, president of Newton-based Homevest Mortgage Corp. and former chairman of the Massachusetts Mortgage Bankers Association, said the recent spike in long-term interest rates indicates the bond market’s confidence the recession will soon be over.

If a bond investor believes that inflation will rise in the coming year, which is what they think right now, then they’ll demand protection in the form of a higher long-term interest rate. And that’s what’s happening. It’s simple economics 101, said Caso.

I was surprised by his notion of interest rates, said Nathan Hagan of Stoneham-based Secondary Marketing Resources, referring to Galvin’s statements in the press release. Hagan is also the newly installed chairman of the MMBA.

I do understand the distinction and how it’s tied into the 30-year rate, said Galvin, pointing out that the issue arose during the press conference.

One of the major strategies [the Fed is] employing to try to recover from this recession is reducing interest rates, and mortgage rates in particular, to encourage money [to flow] into the economy … It is still inexplicable why rates are going up so high, and the offering of the Mortgage Banking Association simply saying ‘gee, there’s more competition so it goes up’ is not enough, said Galvin.

Considering the lengths to which the Federal Reserve has gone in the last year to bail the country out of recession (lowering the short-term rates), said Galvin, it doesn’t make sense that the rest of the industry would be left up to the free market.

I’m saying the sudden spike in rates are suspect. Some of the quotes I’ve seen from some of the people in the industry confirm that. They don’t have a good explanation for why they’ve suddenly spiked, said Galvin.

Caso, however, disagreed with Galvin’s assessment. He’s [Galvin] absolutely wrong. It’s completely controlled by the bond market. The majority of loans are sold on the secondary market to Fannie Mae and Freddie Mac for a fixed-rate conforming product, and those rates are determined solely by government mortgage-backed securities. It’s no more than that, said Caso.

‘Market Forces’
Long-term interest rates have risen 0.5 percent to 0.75 percent in the last six weeks, said Caso. But he added there’s no real motivation for mortgage lenders to push rates up. Believe me, I would say that the mortgage industry, of anyone, does not want to see these interest rates go up – especially people who are originating loans – because it’s good business, he said, adding as the rates have increased over the past month, his unusually brisk business has become much slower on the refinance side.

It sounds like more trickle-down economic theory that doesn’t work, said Galvin.

Obviously, if their review reveals that there are legitimate reasons for that, then that’s fine, but if it doesn’t, then maybe it suggests that there needs to be further action, he said.

If interest rates are going up, it’s largely driven by market forces, said Steven L. Antonakes, senior deputy commissioner of administration and policy at the state Division of Banks.

There are certainly a large number of banks, credit unions and mortgage lenders from which to choose. It’s a very competitive market in Massachusetts with a lot of different types of products out there, he said. The DOB has always encouraged consumers to shop around for the best rates. Rates are still historically extremely low and it’s a great opportunity for those who haven’t refinanced yet … As you know, there’s not necessarily a direct correlation between the action the Federal Reserve takes on short-term interest rates and long-term mortgage rates, said Antonakes.

In addition to his call for an investigation, Galvin said that consumers should be cautious of mortgage lenders packing on extra fees. We’ve had inquiries about fees. It seems as if there’s a tremendous amount of what seems to be duplicative descriptions of what the fees are, document fees and things like that, said Galvin. This area’s largely without regulation. If they can justify a fee in any way, they can charge it. There is no federal preemption on this, said Galvin.

Many times people get sucked in, he said, and experience sticker shock between an estimated cost of closing and actual pricing.

But the DOB said there’s been no outpouring of complaints and it has not witnessed any increases in fee-packing activity.

It’s something we do address in our high-cost loan regulations which came out this spring. I don’t think that in the short term [we] have seen a significant increase in that. But it’s something we continue to review during our exam process, said Antonakes.

Refinancing will entail a credit check, title search, appraisal and inspection, but borrowers should be on the lookout for fees that unnecessarily increase the cost of the mortgage, said Galvin in the press release. Added settlement and closing costs, particularly document preparation fees are an indication that the lender is piling on the cost.

But again, Caso countered that sometimes such fees are legitimate.

He’s right in the sense that a borrower should check their good-faith estimate to make sure the closing costs they receive at closing match the good faith estimate. There’s no question about that, said Caso. But many mortgage brokers and mortgage lenders use third-party document preparation providers, and the costs are passed on to the consumers. That keeps backroom operation costs down, Caso said. Additionally, it helps – at least in the case of some loans, like Federal Housing Administration loans, which require a great deal of confusing paperwork – to rely on an expert source instead of hiring a large staff.

To some extent, it’s the same issue. The market is competitive so that lenders are not going to be able to get away with that [packing fees], said Hagan.

But Galvin said he thinks it’s a significant problem and will continue to monitor the situation closely.