The federal government has come up with a complex proposal to simplify mortgage-shopping.

If the feds adopt the proposal, mortgage-shopping will become less confusing. Closing costs will drop, saving borrowers an estimated $16.6 billion a year.

Mortgage-shopping also could become more confusing because mortgage providers would have two ways to present deals to customers -- a new, easy-to-understand way with a guaranteed interest rate and closing cost, or a simplified version of today's complicated, hard-to-understand way.

The new mortgage shopper
Here's how the easy-to-understand way would work: You, the mortgage shopper, could apply free at several places. Each would give you a two-page form spelling out the interest rate and guaranteed closing cost. You could easily compare these "Guaranteed Mortgage Package Agreements," or GMPAs, to select the best deal. Only then would you pay a fee.

The guaranteed price would roll most closing costs and fees into one lump sum. The lender would be prohibited from surprising you with higher-than-expected fees at the closing table.

"After agreeing to the price of a house, too many Americans sit down at the settlement table and discover unexpected fees that can add hundreds, if not thousands, of dollars to the cost of their loan," Housing Secretary Mel Martinez said in a recent speech. "And at that point, they really have no other options. The borrower is faced with the impossible choice: Either hand over the extra cash and sign, or lose either the house or the funds needed to refinance."

This proposal, Martinez says, will do away with that dilemma. "It's time to take the uncertainty out of the mortgage financing process."

The proposal indeed would benefit consumers, says Susan Johnson, executive director of the Real Estate Services Providers Council, a trade association representing many of the big players in the real estate industry.

"By making the costs firmer and by simplifying the disclosures, it has the potential of increasing shopping by home buyers and people who refinance," she says.

The Department of Housing and Urban Development's 100-page proposal wouldn't require mortgage providers to use the easy-to-compare GMPAs. At the same time HUD proposes GMPAs, the department tinkers with the Good Faith Estimate, the required document that itemizes estimated closing costs and confuses just about every borrower who examines it. Some lenders (especially smaller ones) will prefer to hand out the new Good Faith Estimates rather than the Guaranteed Mortgage Package Agreements.

"In the end, the consumer is going to carry the day," says Lee Howlett, president of ILS, a unit of Fiserv Inc., that offers a host of real-estate settlement services. He believes borrowers would favor mortgage providers offering the simplified rate and price guarantees over lenders offering Good Faith Estimates.

Your mortgage, guaranteed
With guaranteed price agreements, HUD envisions a quicker, simpler, less stressful mortgage-shopping process. You would provide your income information, Social Security number, the address and value of the property you plan to buy, and the amount you want to borrow. The mortgage provider would give you a Guaranteed Mortgage Package Agreement.

Of the GMPA's seven sections, the first two would be most important. Section 1 would specify a guaranteed interest rate, the length of the loan, and annual percentage rate, which is a calculation of the interest rate and certain other costs, such as that for mortgage insurance.

Section 2 would specify one figure: the guaranteed mortgage package price. With a few exceptions, that would be how much you would have to pay to get the loan. The guaranteed price would include origination and discount points, taxes, and fees for credit reports, wire transfers, document preparation, notaries, title company services and more. If the lender requires a pest inspection, lender's title insurance or appraisal, those costs must be included within the guaranteed price.

The guaranteed price would exclude the costs of hazard insurance, optional owner's title insurance, escrow reserves, and interest due from the day of closing until the end of the month.

When all parties have signed the GMPA, the contract is binding. The lender can't change the closing price. If the borrower elects to float the rate, it can change only in relation to an agreed-upon index. Once the borrower has locked in a rate, the lender can't change it.

If you have ever comparison-shopped for a mortgage and scratched your head over competing Good Faith Estimates, you know how welcome this change would be. The Guaranteed Mortgage Price Agreement not only would make it much easier to comparison-shop for loans, but would reduce closing costs.

"This proposal will increase the opportunities for borrowers to shop among packages, fostering competition to lower costs further," the HUD document says.

Johnson, of the Real Estate Services Providers Council, says the proposed rule could "create more consolidation and fewer players in the marketplace" by squeezing out some smaller businesses such as local title agencies and appraisers. Some would go out of business and some would be gobbled up by bigger fish. She believes survivors would compete and borrowers would benefit.

Easing off on kickbacks
Lower costs would result not only from competition, but from cooperation. Federal regulations bar mortgage service providers from giving one another kickbacks and referral fees. The regulations have the unintended effect of banning volume discounts like the concessions that Wal-Mart can extract from manufacturers.

For example, under federal regulations, a bank can't collect a rebate from an appraiser or title company for giving it a certain amount of mortgage business in one month. That would be an illegal kickback. If a bank collected such a rebate, borrowers could file a class-action lawsuit to recover the money. This has the perverse effect of keeping closing costs higher than they need be.

HUD's proposal would do away with these anti-kickback provisions for guaranteed mortgage packages.

The proposal would modify federal regulations under the Real Estate Settlement Procedures Act, a law passed in 1974 to protect mortgage borrowers. As this article is written, the proposal is in the middle of a 15-day Congressional review, during which HUD will not comment. HUD's proposal argues that HUD can make the necessary regulatory changes without the need for Congressional action.

After a 90-day comment period ending in late October, HUD could issue either a revised proposal or a final rule, with the changes going into effect in early 2003.