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HUD Takes Mortgage Simplification Plan Back to Drawing Board
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By Pamela Yip
"I felt it was pretty self-explanatory on what the fees were, but there are so many fees," says Mr. Muller, a commodities trader. "The whole closing process is far too long in terms of the documents. We've got one main document in Australia. You just come in and sign it." Buying a home is emotionally and financially challenging enough, but for many Americans the angst reaches a climax at the closing table, with dozens of documents to sign and a forest of fees to pay. The federal government has proposed making things easier by overhauling the mortgage settlement process with the most sweeping changes in almost 30 years. But simplifying the mortgage process has not proved simple itself. "The process of buying or refinancing a home in this country is too complicated, unclear and costly," officials with the U.S. Department of Housing and Urban Development say in a written summary supporting their proposal. But after two years in the works, the proposed regulation was withdrawn last month by HUD Secretary Alphonso Jackson. Mr. Jackson, who grew up in Dallas, said he heard from numerous mortgage industry groups, consumer groups and members of Congress who said they didn't have enough time to comment on the proposal. He said he planned to resubmit the plan but didn't give a timetable. It's uncertain in what form HUD's proposals would resurface. "Reform is not dead," says Brian Sullivan, a HUD spokesman. "We're simply retooling new regulations in an effort to get this right." The move would come in the form of changes to the Real Estate Settlement Procedures Act, or RESPA, which protects home buyers from exorbitant charges when they close on their home loan. An unusual alliance among industry and consumer groups spoke against the proposed rules. "The magnitude of the changes suggested by HUD in the proposed rule posed significant risks to our housing and mortgage finance systems," the National Association of Mortgage Brokers says. "Therefore, it is imperative that HUD get the details of RESPA reform right the first time." In a letter sent in December to the Office of Management and Budget, a consortium of consumer groups wrote, "Over the past several months, we have found our views mischaracterized in support of significant changes to the rulemaking and feel it is necessary to restate our concerns." Making things clear Mortgage experts and consumer advocates say lenders and mortgage brokers don't do a very good job in explaining who gets paid what fees and where they go. Consumers can feel blindsided if the costs they are required to pay and the deposits they are required to make at the closing table are different than they were led to expect. "This industry has done and continues to do a very poor job of explaining to borrowers the legitimate costs of making them the mortgage loan," says Keith Gumbinger, vice president at HSH Associates in Pompton Plains, N.J., which publishes mortgage information. "What actually constitutes a fee?" HUD's original proposal centered on three issues: --Relaxing current rules that inhibit lenders from offering loan applicants a "guaranteed mortgage package" that would have an upfront guaranteed interest rate and a single guaranteed price for closing the transaction. "For most other purchases a consumer makes, the bottom line price is clear and firm," HUD officials wrote. "Why should it be any different when it comes to the largest single obligation they'll ever undertake – a mortgage loan?" --Improving the Good Faith Estimate. Federal law says that when you apply for a mortgage, the lender must give you a Good Faith Estimate of settlement costs. That document lists the estimated fees you will have to pay to get the loan, such as fees to credit bureaus, appraisers and closing agents. Instead, lenders should provide consumers a firm list of fees, so they can better understand the charges and use them to comparison-shop before they're so heavily invested in the process that they can't back out, HUD officials say. --Improving the disclosure of mortgage brokers' compensation. Mortgage brokers, who say they charge the same fees as bankers do for the same work, generally shop around among several lenders to find the best interest rate for their client. But HUD officials say lenders sometimes pay brokers for delivering customers willing to pay higher interest rates. Consumers spend about $50 billion a year on closing costs. HUD officials project that their proposals would save consumers $8 billion a year, or about $700 per loan transaction. But those in the mortgage industry say the changes that HUD proposed would actually harm consumers. "HUD sold this to the public based on this huge phantom savings they came up with and how it would save the customer money," says Craig Jarrell, president of the Dallas region of Pulaski Mortgage Co., a mortgage banker. "It's not going to save the customer any money because we still have to perform the same services we have now. Just because I add all the fees on my big list and quote it as one number doesn't mean it's going to go down in practice." Moreover, listing a single guaranteed price for closing the loan instead of the current system of itemizing fees would actually offer consumers less information, mortgage brokers say. "The lump sum hides various costs, and new costs can be added at any time without the consumer's knowledge," says Mike Neville, a mortgage broker who owns MGroup Mortgage in Coppell. Still, more lenders are already moving toward a guaranteed price package, says Mr. Jarrell, whose firm will roll out its product around May. "Some lenders have already taken the next step and begun offering a guaranteed price package just as a convenience to the consumer and just to stay one step ahead of HUD," he says. Industry concerns Mortgage providers also say HUD's proposal would force smaller companies to cut their fees in order to be competitive and would concentrate too much power in large banks. "The super-mega-banks would have the pricing power and put the smaller lenders and smaller settlement providers at a competitive disadvantage," Mr. Jarrell says. Mortgage brokers, who originate 75 percent of home loans, bristle at the thought that they would be required to disclose more clearly how they get paid by lenders when banks wouldn't have the same requirement. "All institutions that lend money for mortgages should be required to do the same thing," says Mr. Neville of MGroup Mortgage. "The one lump sum is a guarantee, so if we give a one-lump-sum quote to the customer and if something changes, we're still obligated for that quote, whereas mortgage bankers and banks are not." The brokers cite a February study by the Federal Trade Commission that says the mortgage broker compensation disclosure HUD proposes "is likely to confuse consumers, cause a significant proportion to choose loans that are more expensive than the available alternatives and create a substantial consumer bias against broker loans, even when the broker loans cost the same or less than direct lender loans." Consumers' needs Consumer groups support a guaranteed mortgage package agreement "only if it includes an interest rate and closing cost guarantee and provides prime-market consumers with a real opportunity to shop." It should also be made clear that the proposed rules don't address predatory lending, and they should be crafted so that they don't lead to predatory lending, the consumer groups said. Some consumer advocates wonder whether HUD is still committed to actual reform. "We hope that the right mix of rule changes will reach broad agreement," says Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. "I just don't know whether this will be one of the top priorities for the new HUD secretary." Mr. Gumbinger of HSH Associates was equally skeptical. "I do not think that any final regulation is going to provide the form of benefit which was originally envisioned, which is to make it simpler and less expensive for borrowers to shop for mortgages, because so many different interests in the mortgage process need to come to an agreement," he says. "It's difficult to expect that that will happen." TIPS Do your homework: When you're shopping for a mortgage, research not just interest rates, but also closing costs. And ask lenders what their annual percentage rate is because the APR is the interest rate and the closing costs combined. Study the Good Faith Estimate: That document lists the estimated fees you will have to pay to get the loan. It also identifies who is expected to provide services and receive fees in connection with your loan, such as credit bureaus, appraisers and closing agents. The law requires lenders to give you a copy of the Good Faith Estimate of settlement costs. Study it carefully and don't be afraid to challenge any fee you don't understand. You have the right to inspect the Settlement Statement one business day before closing, so take advantage of that. Check for discrepancies between the Good Faith Estimate and the Settlement Statement. Do comparisons: "Consumers should be comparing the most expensive components of their loan – the interest rate and any percentage-based fees they may be required to pay, discounts points, origination fees," said Keith Gumbinger, vice president of HSH Associates, which publishes mortgage information. Pick your battles: "The lender has very little control over many of the fees – recording fees, third-party fees like title fees, inspection fees," Mr. Gumbinger said. SOURCE: Dallas Morning News research TIMELINE 2002: The Department of Housing and Urban Development wants to encourage lenders to offer closing costs as a lump sum, to require firm estimates of closing fees and to require fuller disclosure of mortgage brokers' fees. March 22: HUD withdraws the rules, saying more study is needed. What's next: HUD plans to revamp the rules but won't say when. ----- To see more of The Dallas Morning News, or to subscribe to the newspaper, go to http://www.dallasnews.com.
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