There has been a lot of headline news focusing on subprime loans and the controversy around this particular lending practice.  I’d like to take a closer look at this issue with the help of a document that is available from Fannie Mae (Lax, et al, “Subprime Lending:  An Investigation of Economic Efficiency”, Housing Policy Debate, Vol. 15-3, Fannie Mae Foundation 2004).  This document provides data from a survey that Fannie Mae asked Gallup to conduct to collect data on the demographics and experiences of consumers with prime and subprime loans. 

Dictionary.com provides the following definitions for subprime:

1. being of less than top quality.

2. being below a prime rate.

The data shows that both definitions of subprime can be applied to the loan that a consumer ends up with.  These definitions can also be applied to the service and product, as well as the business practices, of some lenders who provide and service these loans.

The survey and the analysis compared borrowers with prime and subprime loans.  The data shows that Asians, Hispanics and African-Americans all accounted for a higher percentage of consumers with subprime loans versus prime loans.  Borrowers over the age of 55 stuck to the same trend as other minorities.  These groups are disproportionately more likely to end up with a subprime loan.  Neighborhoods with a high percentage of minority residents were also areas that showed a high concentration of subprime loans.  Borrowers who had subprime loans were less likely to be satisfied with their loan or the process and also faced significant application hurdles such as paying off debt or being turned down for a loan.

One of the most interesting findings (and most relevant to lowerfees.com) was that 25 % of borrowers who took subprime loans paid more than two origination points.  This is more than two and one-half times more than those with prime loans.  And I quote:

“Even at this, the reported difference in points likely understate the total difference in fees typically paid by subprime borrowers.  Our subprime focus group participants, for example, disproportionately reported that significant origination fees were rolled into the principal of their mortgages.”  These data clearly show that discriminatory practices are applied to minorities seeking loans and the fees that they are forced to pay on closing.  It has been established that credit score and worthiness are not linked to race or ethnicity, and this survey shows that despite the fact that minorities do not represent a more significant risk they are burdened with higher fees and interest rates and make up a higher than expected percentage of totals subprime borrowers.  Lowerfees.com offers a new, more efficient and transparent process that eliminates discrimination and saves everybody money when closing a loan. 

There has been a push recently to encourage consumers to use no-closing-cost loans.  Most consumers are not naïve enough to think that there is actually no cost to these loans.  There are a number of well-written blogs and publications detailing the pros and cons, pitfalls and things to be aware of when considering a no-closing-cost loan.  There are still fees to be paid on closing (title, appraisal, etc.) and the reality is that no-closing-cost really means no lender fees. 

There currently exist three basic ways to cover closing costs:  pay them in full at closing with available funds (i.e. write a check), add them as additional principal onto the new loan balance, or have them waived in exchange for a slightly higher interest rate.  The consumer’s individual situation will dictate what is best for them, but most consumers don’t choose to pay the additional thousands of dollars out of pocket.  Whether they are paid by increasing the loan amount or as additional interest, or even up front, the amount of the total cost of closing represents a significant dollar amount.  You can always try to negotiate these fees with your lender or broker, or shop around to get the best price, but these methods are not reliable and still do not force the providers to be accountable to the initial quote. 
Lowerfees.com offers the consumer a new way to reduce the fees associated with closing a mortgage loan.  By making the process transparent and providing multiple service provider (appraiser, home inspector, title) options at each step, the consumer is able to save money on the overall cost.  The process is transparent throughout and the customer is able to track progress during the entire transaction.  Rather than a nebulous good faith estimate that can change at the last minute, consumers are able to choose providers with references and fees quoted up front.  Education, full disclosure, up front quoting on fees, competition and a transparent process mean big savings on closing costs, even on a no-closing-cost loan.