A Good-Faith Effort To Clean Up Estimates
It's a distressingly familiar scenario for home buyers and refinancers, and it was one of the major mortgage-related consumer complaints to federal agencies in 2005: "good-faith estimates" of settlement costs that turn out to be hundreds, even thousands, of dollars off the mark.
Previously undisclosed charges for "processing," "administration" and other vague services mysteriously appear out of nowhere on the HUD-1 settlement form. What was estimated upfront as $2,200 in total fees turns out instead to be $3,400 at the actual close of the transaction.
That, in turn, forces consumers into a difficult choice: Do I pay the extra charges even though they were never included in the good-faith estimates? Or do I blow up the whole deal -- potentially losing the house I want to buy or the mortgage I need -- because of a lowball estimate?
Federal housing officials are working on possible remedies, but here's some unexpected good news: Mortgage lenders are, too. Growing numbers of them have gotten the message from their customers -- we demand certainty about fees -- and they are debuting new ways to turn their estimates into binding promises.
For example, this month SunTrust Mortgage Inc., which is among the 20 highest-volume home lenders in the country, began rolling out what it calls "good-faith guarantees." When retail loan applicants receive their good-faith estimate disclosures, SunTrust now adds language that commits the company to deliver those prices at settlement. SunTrust Mortgage is a subsidiary of Atlanta-based SunTrust Banks Inc. and operates in all 50 states and the District.
Another large mortgage-industry player, LendingTree LLC, has begun offering lenders on its network what it calls settlement service "bundles." The prepackaged bundles include everything needed to close the mortgage, from title search and insurance to credit reports and appraisals. They often carry lower total costs to lenders than the lenders would pay to assemble the same services on their own.
Participating lenders are better positioned to offer more accurate estimates of total closing charges and even pass on the lower, wholesale market costs to borrowers. LendingTree is a Charlotte-based national mortgage and realty services aggregator that connects loan applicants with 260 independent lenders that participate in its network. It typically promises mortgage applicants competitive quotes from up to four lenders. Roughly 50 of its lenders are now buying settlement service bundles through LendingTree Settlement Services LLC, its wholly owned, in-house "vendor management" company.
Sterling Edmunds Jr., chief executive of SunTrust Mortgage, said: "We listened to our customers, and they told us that the important thing to them is certainty" about settlement cost estimates. "So now we're going to guarantee them."
As an alternative to guaranteed estimates, SunTrust also offers fixed-fee "packages" of services upfront, allowing applicants to compare SunTrust's total costs with those of competitors such as ABN Amro Mortgage Group Inc., Ditech.com and E-Loan Inc., which promote their own versions of guaranteed-settlement-cost programs.
Behind SunTrust's innovations on fees is the same concept that underlies LendingTree's: acquisition of services from vendors that specialize in pulling together title, appraisal, credit, flood-zone certification and other settlement services at discounted, wholesale market costs.
The vendors typically have negotiated contracts with hundreds of individual providers of services across the country who are willing to accept lower fees in exchange for higher volume of orders. Instead of buying your appraisal here, your title insurance there and each of your services from a different source, you buy a complete package from a specialized settlement vendor, generally with a lower total cost.
David Anderson, general manager of LendingTree Settlement Services, said his company got into the business of offering bundled services as both a quality-control measure and a way to reduce costs for lenders and their borrowers. Consumer research by LendingTree found that although customers often were satisfied with the rates on the loans they obtained, too often they were unhappy about the closing process.
"We kept hearing about situations where unexpected fees would pop up and [borrowers] would say, 'Oh, my goodness, here's another $3,000 I didn't know about' " on the settlement sheet.
Now LendingTree essentially buys the services itself -- at wholesale -- and has better control over the quality, timeliness and pricing of those services through its lender network participants.
Bottom line: With lenders themselves stepping forward to deal with closing-cost shocks and consumer abuses, who knows what's next? Maybe good-faith estimates just might come with a lot more good faith, and a whole lot fewer rude surprises at settlement.
Kenneth R. Harney's e-mail address isKenHarney@earthlink.net.