|Federal proposal aims to tame
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
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
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
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
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
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
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.