In 2023, Fannie Mae and Freddie Mac announced plans to make it easier to buy a home and close the racial homeownership gap in the United States.
Homeownership is one of the most important decisions in a person’s life and is a primary vehicle for wealth creation for the majority of households. In fact, our most recent analysis of the benefits of wealth creation from homeownership shows that for families in the bottom 20% of the income distribution, the median net worth of home-owning households was 43 times greater than similar renting families and housing equity is the largest source of wealth for all but the highest income families in the United States.
Yet, affordability now sits at historic lows and the prospect of homeownership seems more out of reach for low- and moderate-income families than ever before. That’s why the path toward equal access to economic opportunity includes ensuring access to homeownership for all.
Part of the equitable housing plans’ approach to achieving more equity includes reducing the costs and fees associated with buying a home that are often cited as a homeownership barrier for low- and moderate-income and non-white households. Specifically, title and settlement fees have been characterized as a high-burden and regressive (costing proportionally more for low- and moderate-income borrowers) cost to borrowers. In fact, neither is true.
Title and settlement: Neither regressive nor a significant component of closings costs
Research published by Fannie Mae in papers in 2021 and 2022 helped to demonstrate a more accurate relationship between borrower groups and closing costs by examining over a million loans acquired by Fannie Mae in 2020 and controlling for a variety of borrower characteristics (ethnicity, first-time and low-income). The research found that title and settlement fees are neither regressive nor represent a significant component of the overall closing costs.
The Fannie Mae research finds that for title and settlement fees, “differences in charges across borrower groups mostly disappear (after controlling for the transaction characteristics).” What differences do exist are very small. Asian borrowers pay $13 less than non-Hispanic white borrowers (the control group); low-income borrowers pay $14 more; and first-time home buyers pay $11 less than repeat buyers.
The authors say these are “not economically meaningful” differences. Given the typical borrower is paying more than $7,000 in closing costs, that might be an understatement. The research also finds that title and settlement fees increase with loan amount (a 1% increase in loan amount is associated with a $7.41 increase in fees). So, title and settlement fees are progressive if, as all the data suggests, higher income and repeat buyer customers buy more expensive homes with larger loans.
Less than 1% of borrower’s life-of-loan costs
But what about the share of the life-of-loan costs that title and settlement fees represent? Based on the Fannie Mae-published papers and their assumptions, the figure below shows the borrower’s average life-of-loan costs and fees of homeownership, bundled together according to who receives the fees. The figures are shown for a borrower with an average purchase price of $318,000 in 2020 and assumes that the borrowing household will keep the loan for seven years.
The borrower’s largest life-of-loan costs are the property taxes and recording fees paid at closing plus the accumulated cost of annual property taxes paid over the life of the loan. The fees paid to the mortgage-backed security (MBS) investor and lender are next with the accumulated cost of the annual interest payments made to the investor(s) that purchased the MBS bond containing the mortgage, and the lender’s net origination charges at closing plus the accumulated value of the excess interest the lender charges for profit.
Homeowner’s insurance, the servicer, and even the GSE (the actual holder of the default risk on the mortgage), represent small overall costs by comparison. The title insurance premium and settlement costs (collectively title and settlement fees), along with the accumulated costs of the annual mortgage insurance premium, barely equate to 1% of the borrower’s total life-of-loan costs.
Peace of mind on largest transaction most will make in their lives
Buying a home is a complicated financial transaction that few families do more than once or twice. The choices are complex and the “mortgage math” can be hard to comprehend. There are many different costs and fees associated with purchasing a home with a loan and it’s often not clear who the beneficiary is, or what the reason is for the cost or fee. Some fees are charged once at closing, others over the life of the loan, and one is never sure exactly what the costs and fees will amount to until just a few days before closing.
So, what’s peace of mind worth? For less than half a percent of the purchase price, or about the monthly equivalent of an Amazon Prime subscription, title insurance protects one of the most important purchases in someone’s life. A title insurance policy protects homeowners from having to pay for the costs, legal and otherwise, of resolving any covered title claim that may reveal itself after the closing.
Property ownership can be called into question over something that was missed in the title search and examination prior to closing, a boundary line dispute with a neighbor, or even fraud and forgery among other potential threats. The protection title insurance provides is most valuable to the low- and moderate-income home buyer, who otherwise could not afford the thousands or even hundreds of thousands of dollars needed to defend a threat to their ownership rights.
Missing the forest for the fees
Seeking to reduce the barriers to entry for low- and moderate-income and non-white home buyers is a worthwhile endeavor. However, targeting title and settlement fees, which are de minimis life-of-loan costs with significant benefits compared to every other cost component for borrowers, is missing the forest for the fees. It’s notable, for example, that any discussion about taxes and government fees baked into closing costs has been absent in this debate. These closing costs serve as more significant potential barriers to entry for low-income homebuyers, and Fannie Mae’s own analysis proves it.
Mark Fleming serves as the chief economist for First American Financial Corporation, a provider of title, settlement and risk solutions for real estate transactions and the leader in the digital transformation of its industry.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
