ONE OF THE MOST popular trends in the home-equity lending market is about to make a big splash in the primary home-loan arena: mortgages that carry no lender fees, no appraisal charges, no fees for credit report, loan origination, tax service, processing, document preparation, courier or other mind-numbing add-ons that buyers get hit with when they close on their loans.
Big banks have been selling home-equity credit lines this way with booming success for the past two years. Now some of them are asking: Why not provide the same simplicity to homebuyers? Why not make things as easy for people shopping for a first mortgage as we make it for them when they take out an equity line or second mortgage? Every consumer research study says that is what shoppers really want - quick, simplified home loans with no junk fees attached.
First out of the box with this concept is Bank of America. Starting this month, it is offering what it calls its "Mortgage Rewards" plan, which essentially brings its streamlined, zero-cost equity line program to people shopping for primary mortgages to buy homes. Mortgage industry sources say other large, well-known banks are developing their own versions of the concept, so it is worthwhile taking an advance look at Bank of America's prototype.
The key to the plan, say the bank's top mortgage officials, is that it has very few working parts for consumers to puzzle over. The note rate you are quoted as a shopper incorporates every traditional loan origination and settlement fee - except one. Stripped to its essentials, it is a "zero-cost" mortgage - all fees are rolled into the rate - except that the buyer must pay title insurance charges, which can vary widely from state to state, and are disclosed at application.
The bank not only will quote applicants the rate and annual percentage rate (APR) required by federal truth-in-lending rules, but it plans to urge shoppers to take its quotes and compare them with competitors' loan rates that come with traditional closing cost estimates.
"We think we will come out very well on a head-to-head, APR-to-APR comparison basis," said Bank of America mortgage executive Eric Telljohann, who directs the new program.
Unlike existing competitors in the streamlined home-loan market, such as giant ABN-AMRO Mortgage Corp. and General Motors subsidiary Ditech.com, Bank of America's program doesn't quote a fixed-fee "package" of costs along with the interest rate. There is no "package" per se because all the fees are paid for in advance by the lender and incorporated in the rate quote and APR disclosure. The only add-on is the title policy.
Telljohann said the company tried to find a way to fold title insurance charges into the rate, but that current state insurance regulations in many parts of the country made that impossible. To partially offset the title insurance expense, the program provides a $200 credit for "closing" and offers lower-fee title insurance through negotiated arrangements with national title insurance carriers.
Ernest Smith, the head of Fidelity National Financial's title and mortgage services division, confirmed that his company is aiming for eventual title savings to consumers of 40 percent or more through participation in streamlined, high-volume programs such as Bank of America's.
Telljohann said the cost-cutting effort touches every line item in the new loan program - so much so that applicants can expect to save from $2,000 (on a 15-year $100,000 mortgage) to $3,986 (on a $400,000 loan.) Some of the savings will be generated by discount-cost "bundling" deals that Bank of America has negotiated with credit, appraisal and other vendors, according to Telljohann. Still other savings will come from the fact that the program is targeted at the 33 million consumers who have checking, savings, credit card or other financial relationships with Bank of America.
"We already know these people," said Telljohann. That allows the bank to save money in marketing, underwriting, credit risk evaluation and other traditionally costly upfront activities.
Though competitors haven't yet seen the program details, at least one of them welcomed the new entry to the streamlined "bundled services" mortgage market.
"I applaud Bank of America for making this effort" toward simplifying the loan process, said ABN-AMRO Senior Vice President Garth Graham, who supervises his firm's "one fee" guaranteed-cost program.
Some additional facts about Mortgage Rewards: Initially it will be available in 20 states, including Maryland, and the District of Columbia, where Bank of America has retail financial centers; in the fall, eight more Northeastern states will be added. The program also comes with an optional "borrower protection plan" that makes monthly mortgage payments for six months in the event of a homeowner's unexpected loss of employment.
Kenneth Harney's e-mail address is KenHarney@earth link.net.