Is there any hope for simplifying the paper-laden, costly and often confusing American system of closing a home mortgage? Can anybody help straighten out the mess?
Housing Secretary Alphonso Jackson thinks so and is expected to lay out a road map soon on how to do it. The new effort, which will begin with a series of national forums for consumer and industry groups in mid-July, is expected to culminate in a new set of proposals to streamline the entire loan application and closing process. Hearings focused on the concerns of small businesses in the mortgage settlement field are planned for Los Angeles, Chicago and Dallas-Fort Worth later this summer.
Jackson and his top aides at the Housing and Urban Development Department say they want to hear from everybody with a good idea. They also emphasize that they are not wedded to proposals first floated in 2002 that ultimately were withdrawn under congressional and industry lobby pressure.
Here are some of the broad areas of inquiry the upcoming reform efforts are likely to pursue:
* How can 11th-hour surprises on settlement fees be eliminated or reduced? Thousands of borrowers have complained to federal regulators that they were given "good faith estimates" of total transaction fees by their loan officers that turned out to be low-balled -- hundreds or thousands of dollars less than what they were asked to pay at the final closing.
Federal truth-in-lending rules require good faith estimates be provided within three business days of a loan application. But no federal law requires lenders, brokers, title or escrow companies, lawyers, appraisers or other vendors to stand behind their estimates. As a result, title insurance and settlement fees estimated up front at $2,000 routinely morph into charges of $3,000 to $4,000 on the final settlement sheet. Lender charges can suddenly balloon by $1,000 or more, thanks to previously undisclosed "junk fees" for processing, commitment, document preparation and a wide array of creative, last-minute items.
* Can transferring all or most of the responsibility for paying for these services to lenders themselves lessen the problem? Should lenders or other service providers be encouraged to roll all loan, title, appraisal and settlement-related charges into a single number that they can quote -- and guarantee -- to loan shoppers up front?
Rather than getting simply a rate quote from a lender, you would get a comprehensive quote covering the whole deal. For example, you might be quoted a 30-year fixed interest rate of 5.75 percent, plus guaranteed settlement charges of $3,500. If costs exceed the $3,500 estimate, it would be the guarantor's problem, not yours.
Some lenders already offer fixed-fee packages, most notably ABN-Amro Mortgage Corp. and GMAC's Ditech.com subsidiary. Bank of America also offers a variation to its customers that eliminates all lender and settlement charges except title insurance. Consumers seem to like the simplicity: ABN-Amro says it closed half a billion dollars worth of "one-fee" mortgages during May alone.
* Can the total costs of the settlement process be sharply reduced? Almost nobody doubts that the answer is yes. Take title insurance, for example. One of the largest items at closing, title insurance premiums are poorly understood by the home buyers who pay them. In many areas of the country, 80 percent or more of title premiums go to the settlement or title agency, and often get split with realty brokers. In other words, just 20 percent of the premium actually pays for the insurance policy itself.
Nobody in the pipeline tells consumers where their premiums really are going or the true cost of the product they are buying. But enlightened home buyers and refinancers can demand -- and get -- lower premiums. Cutting out the fat in that area alone, especially the lucrative splits with the realty firms who steer business to affiliated title and escrow companies, could save billions of dollars a year.
But that big money currently pays for entrenched lobbies at the state legislative and congressional levels that are pledged to preserve the profitable status quo.
The key question facing settlement-cost reformers in the months ahead therefore may not be: Can we streamline the system and reduce fees? More likely it is this: Can we cut through the protective thicket of lobbyists and political allies who like things just the way they are and are determined to keep them that way?
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.