Overhead is a concern of any company that plans on staying profitable and in business. In a contracting economy, a company's potential client base usually shrinks, despite overhead remaining the same or increasing due to internal costs rising (for the same reasons), therefore companies are forced to charge their current clients more to meet their overhead demands.

In the lending industry, there is another factor that must be considered, lending guidelines. As guidelines tighten fewer people qualify for loans. This does not necessarily mean the application rate has dropped. If the same number of applications is coming in, but not as many of the applicants qualify, lenders are forced to charge the qualified borrowers more to offset the costs associated with researching the denied applicants.

Of course in this situation companies look to trim costs wherever possible to remain compeititve in the market. Regardless, certain functionality cannot be trimmed, and if the costs associated with these services rise, even trimming many not be enough to offset. An example we can all relate to would be the rising cost of gas prices in the last couple of years. As the cost of a gallon of gas rose, the cost of you getting to work rose; if you did not get a salary increase to offset the rise in gas prices, you were making less than you did with lower commuting costs. To reduce your personal overhead in this situation, one might stop buying coffee on their way to work, or begin bringing their lunch in as opposed to eating out.

Business must deal with these budgeting concerns in markets similar to you managing your own finances, and if there is not enough money coming in, they are forced to make changes that could result in higher costs to the consumer.

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This is ultimately because of the recent drop in interest rates. One of the most expensive costs in originating a loan is in promising the loan to Fannie/Freddie/Ginnie and then not producing that loan. Any time you make a loan application and lock in an interest rate, the bank that you locked with pledges your loan to either Fannie Mae, Freddie Mac, or Ginnie Mae depending on the type of loan that it is. This means that they will tell Fannie for example that they will deliver a loan at X interest rate for X dollars by a specified date. They then have that much time to close your loan and deliver it to Fannie.If they cannot do this, or break the lock, or the loan is cancelled they must pay a fee to Fannie Mae.

Additionally these numbers are tracked and will impact the pricing that Fannie gives the lender, as well as other aspects of their annual negotiation with Fannie. You see each bank works out a contract with Fannie/Freddie, etc each year and the better that bank is performing, both in the percentage of loans that they deliver versus lock, and percentage of loans that go bad, can have an impact on the terms of their agreements.If you lock a loan and then cancel the loan, or go to another lender, the bank that locked your loan in and started your application has to pay a fee, as well as take a hit to their pull through ratios.

Additionally, because of low rates, lenders went from well under capacity to well over capacity in a few days. This means that as their pipelines reached a point past what they can typically handle they now have to hire more staff, or pay overtime to operations staff to help the loans that they have taken in close.

Because of this most lenders countered with higher application fees. The general thought is that:

1. Charging a higher application fee will take those who are not serious about obtaining a loan out of the picture, and
2. A higher application fee means that a borrower is more committed to closing that loan with that lender.

If you put yourself in the shoes of the bank, a higher application fee becomes necessity to both slow new loans coming in, as well as commit those loans to closing with you. While it becomes expensive to a consumer to make a loan application, the banks that instituted their higher application fees have deemed it a necessary business expense to raise their cost of obtaining a loan to protect themselves. You will find that most of the higher application fees are limited to national banks and lenders, and even then the higher application fees typically come with a credit at closing for the difference. Ultimately because of the influx of new loan applications due to the historically low interest rates, banks and mortgage lenders have decided that higher application fees are a necessary evil to protect their future business.

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For many reasons but two key ones:

First, because the cost of submitting a loan to a lender has increased.  The agencies have announced increases in submission fees and a plethora of risk-based adjustors. 

Second, to slow down "fall out".  Consumers don't necessarily understand that while "rate shopping" is a prudent exercise, what has happened is that borrowers will continue to rate-shop even after requesting that their rate be "locked".  If rates improved and they have found a "better deal" -- they then complete the loan with the other mortgage broker/banker.  The original broker then has a "hit" against them (fall out).  The final lender where this file was to be submitted penalizes the broker/banker -- by moving them to a lower pricing tier or worse, will terminate the wholesale relationship.

Many brokers/bankers charge an application fee -- sometimes refundable at closing, sometimes not -- to discourage one from just going elsewhere -- and realize that there is a significant cost involved in taking the application, running credit, pre-processing for approval and submission to the final lender.

Most borrowers do not understand the relationship between rates and closing costs -- and the "accounting" of closing costs and where this money is applied to and ends up.

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