Reform to save on closing fees is under attack

Nation's Housing

August 11, 2002|By KENNETH HARNEY

MORTGAGE AND settlement-service industry groups are toting up how much money consumers will pocket if the Bush administration pushes through its proposed closing-cost reforms for home loans.

The estimated savings to consumers are huge - in the neighborhood of $16 billion per year in lower fees on home purchase loans and refinancing, according to federal economists. The reform proposals are intended to squeeze excess fees out of the mortgage finance system by introducing new, competitive pressures on key service providers: lenders, brokers, title insurance agencies, settlement attorneys, appraisers and others.

Groups facing the heaviest economic hits already are attacking the proposals and mapping out battle plans to block the changes before they can take effect. Whether they succeed or not will likely determine whether loan applicants get to see any of those savings, beginning in 2003.

Where is this high-stakes home-real estate controversy headed? What specifically does this mean for consumers and mortgage industry players? Here's a quick overview of the key issues:

The mortgage settlement-cost reform proposals pushed by federal Housing and Urban Development Secretary Mel Martinez would drastically overhaul the present system that most borrowers use to obtain a home loan. One of the proposals would encourage lenders to offer guaranteed-fee mortgage "packages" with rates and settlement charges locked upfront, at the shopping stage.

Borrowers could compare not only interest rates from competing lenders, but their bottom-line settlement costs as well - before having to pay any fees or commit to a particular loan.

For example, one lender might offer a $175,000 30-year fixed rate mortgage at 6.5 percent, with a guaranteed closing expense of $3,800. A competing lender might offer the identical rate but with $600 lower closing charges. Your choice between the two would be simple.

Lenders would have incentives to assemble the rock-bottom lowest cost package of services - from appraisals to title searches, title insurance and closing fees. They'd also have to rein in some of their own fees for origination, processing, administration, document-preparation and underwriting that often mystify consumers.

In exchange for offering guaranteed-fee quotes, lenders would be relieved of federal regulatory oversight on referral fees or kickback arrangements among themselves and their settlement-service providers.

A second key element in the reform plan allows lenders and borrowers who prefer not to use guaranteed-fee packages to operate under a modified version of today's rules.

Lenders would quote rates up front and would - as they do today - provide applicants with "good faith estimates" of settlement costs within three business days of application. The reform proposals would require lenders to guarantee some of those estimates and allow a variance of no more than 10 percent above the initial estimate on others.

Billions in savings per year may sound like great news to consumers, but some settlement service providers view them as an economic threat.

Washington lawyer Sheldon E. Hochberg warned in a report for the American Land Title Association that "providers of title and closing services are likely to face significant pressures to offer cut-rate prices or cut-rate services in order to be selected for inclusion" in package deals quoted by lenders.

"While [federal authorities] believe such loss of revenues ... is desirable if consumers reap the benefits," says the analysis, "there is no comprehensive study ... that supports the conclusion that the loss of such revenues ... will eliminate `fat' or unnecessary services."

Federal housing officials are convinced such "fat" does indeed exist in the mortgage settlement system. But the same officials concede they are in for a rough fight against industry groups who don't share their zeal for cost-cutting.

The settlement reform proposals are open for public comment through Oct. 28. They are likely to be revised and adopted in final form by early 2003. Then the real fight is likely to begin - in the courts and in Congress.

Kenneth R. Harney is a syndicated columnist. His e-mail address is kenharney@ Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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