Do U.S. Borrowers Overpay Mortgage Fees?

Using newly available origination fee data in the HMDA, I provide evidence of borrower overpayment in mortgage origination fees: 1) borrowers do not appear to trade off fees against interest rates; 2) there is substantial fee dispersion even after controlling for lender, borrower, location, and time fixed effects. Both patterns are more pronounced among less sophisticated borrowers. Benchmarking loans made to lenders’ own employees suggests that the average profit markup from fees is approximately 51%. I also examine how borrowers can reduce mortgage costs. Using “shopped” loans identified in the HMDA, I find that shopping significantly reduces fees. Borrowers also achieve lower total borrowing costs (i.e., the sum of interest rates and fees) by either engaging brokers or by using simplified pricing structures. Of the three approaches, shopping yields the largest reduction in borrowers’ total costs, while simplified pricing structures yield the smallest.