Pullback of settlement reform explained by political realities

Nation's Housing

March 28, 2004|By KENNETH HARNEY

ARE THE BUSH administration's ambitious plans for nationwide reforms of home mortgage settlement practices dead?

That's a widespread view among mortgage and real estate lobbyists on Capitol Hill in the wake of the sudden withdrawal of the proposals Monday by the Department of Housing and Urban Development.

Acting HUD Secretary Alphonso Jackson said the pullback was needed to allow the department time to consult with congressional and mortgage settlement services groups. He said a revised reform proposal might still be proposed but would not commit himself to a timetable.

Behind the pullback were hard political realities:

Trade lobbies opposed to the HUD reforms called in their political chips on Capitol Hill this month and rallied 226 members of the House - a bipartisan voting majority - to sign a letter demanding a revamping of the reform plan.

The Senate's housing subcommittee chairman, Republican Wayne Allard of Colorado, placed Jackson's nomination to the top job at HUD on hold, pending resolution of the settlement reforms issue.

The White House, which had endorsed the reforms and supported its prime advocate, former HUD Secretary Mel Martinez, found the issue a needless and noisy distraction in a tough re-election year. Martinez resigned from HUD in December to seek a U.S. Senate seat in Florida.

The reform proposals never were popular with the industry groups, whose fees and long-standing practices they threatened. HUD received more than 40,000 mainly critical responses to its plans from mortgage brokers, title insurance agents, real estate settlement lawyers, realty brokers and others.

Some consumer groups turned against the plan out of fear that the new rules might leave lower-income and unsophisticated borrowers open to new abuses by lenders and settlement agents.

In the end, there was virtually no political downside for the White House and HUD in putting the reforms on the back burner, but potentially severe political costs if they ignored fellow Republicans' demands for changes.

What was in the Bush-Martinez reform program that upset so many people?

For starters, it sought to promote the concept of guaranteed-fee mortgage packages, giving homebuyers and borrowers an upfront combined quote for loan origination charges and settlement costs.

The ironclad-guarantee concept was a response to consumer unhappiness with the current system, in which last-minute, unexpected settlement fees can add hundreds or even thousands of dollars to the cost of a mortgage closing.

The HUD proposal would allow shoppers to compare guaranteed packages of rates and settlement fees among competing lenders before making a commitment.

The lowest-cost package would have the advantage in a free market environment, an advantage that critics charged would harm small settlement service providers who would be at the mercy of large lenders seeking bargain-basement prices for appraisals, credit reports, title insurance and other services.

Other proposed reforms would have forced lenders to be more accurate in the "good faith estimate" disclosures of costs they provide to loan applicants. Still another would have changed the mandatory disclosures mortgage brokers must make to consumers about certain origination fees.

How should consumers proceed now that the reforms are on ice, at least temporarily? Here are a few suggestions:

Put the best of the reform concepts to work for you, despite their absence from the federal rulebook. Many mortgage brokers and lenders are willing to give their clients advance guarantees of certain closing costs, if requested. When you shop, ask them whether they will stand behind their upfront quotes and to put that in writing. If not, ask why. After all, they are the mortgage professionals, they know the likely charges you'll encounter.

Demand clarity and credible explanations for all fees lenders and settlement agents seek to charge you. Do not tolerate settlement sheets riddled with fluff charges such as "Admin-$350," "Processing-$450," "Doc Prep-$250," "Attendance Fee-$100," to name just a few commonplace junk fees.

Ken Harney's e-mail address is kharney@winstarmail.com.

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