New Rules May Simplify
Shopping for a Mortgage

Aug. 25, 2003 -- When Mel Martinez bought a home in McLean, Va., two years ago, he was dismayed by the cost and complexity of closing on a $500,000 mortgage. Although a lawyer, he says, "I didn't have a clue as to what I was signing."

But he was starting a job where he could do something about it. As secretary of Housing and Urban Development, he proposed rules last year to simplify real-estate closings and make it easier for consumers to shop for the best mortgage deal. The key change: Lenders would have to offer a more reliable estimate of closing costs when a borrower applied for a mortgage, and they'd have a strong incentive to guarantee the interest rate, too.

Millions of Americans have faced mortgage closings in recent years, either while buying homes or refinancing, as interest rates moved steadily lower until recently. For many, the experience is both baffling and frustrating. Borrowers regularly complain that even though they shopped diligently, they ended up paying more at closing than they expected, thanks to fees that ballooned or showed up only at the last minute.

Mr. Martinez wants to fix this by getting borrowers a clear view of all costs early on in the process, so they can shop effectively. He thinks this would lead lenders to offer lower costs in order to compete. A 1974 federal law gives him power to change the closing-cost system.

But one thing stands between him and his reform: the powerful real-estate industry. Its various players collected a total of more than $50 billion in fees last year from people who bought or refinanced. Now, many of those who profit from the mortgage industry, including title insurers, mortgage brokers and real-estate agents, feel threatened.

They worry that any broad change in the three-decade-old system can only shrink their piece of the pie, and probably make the pie itself smaller. They're especially troubled now because the falloff in refinancing since interest rates turned up could hammer their profits.

Many are lobbying fiercely to kill or at least change HUD's proposed overhaul. They wield a simple but potent argument: Don't tamper with the housing market, one of the few true sources of strength in the U.S. economy. HUD replies that its plan not only wouldn't upset mortgage lending but would make it simpler and cheaper.

Many providers of real-estate services also fear the plan would give big banks greater control of the mortgage process, and the power to lean on all of the other players for discounts. Banks generally support the plan, although they, too, want some changes.

HUD has rarely faced such a storm. In a small room at its Washington headquarters sit 15 boxes jammed with 45,000 letters and cards about the proposal. In one, a mortgage broker blasts the plan as "unconstitutional and un-American."

The debate has boiled over in Congress, where legislators urged on by industry lobbyists have railed against the plan. At a heated hearing in March, Republican Rep. Don Manzullo of Illinois called HUD's economic analysis "appalling" and demanded that HUD witnesses tell him the impact on small business. That will be the first question they'll face in a lawsuit, he said, so "pretend this is a deposition." Then the congressman, who before his election often served as a lawyer in real-estate transactions, ordered all HUD staffers present to stand and identify themselves so he could publicly berate them.

Says James Maher, executive vice president of a title insurers' trade group, HUD's attempt to fix the mortgage process is like "a regulatory Vietnam.... No one will be satisfied."

HUD's goals are both to force costs lower and to eliminate the closing-day surprise that angers borrowers, what many see as bait-and-switch tactics. All mortgage applicants currently receive "good faith" estimates of their closing costs when they apply, as required by law. But there is no enforcement. If the lender springs a fatter set of fees at the closing, for example, borrowers have no recourse except to walk away and risk losing the house or the refinancing opportunity.

HUD's proposal would give lenders two options. One is simply to provide a good-faith closing-cost estimate and stick to it. The second is to provide a "guaranteed mortgage package," promising, at application time, both total closing costs and the interest rate.

The second option would require a greater upfront commitment from lenders. In return, they would be exempted from having to itemize closing costs. And they would be exempt from a 29-year-old kickback ban that effectively bars them from doing deals with other segments of the real-estate industry.

If those exemptions don't sound much like reforms, HUD has an explanation. It says they would enable banks to hold down closing costs by making arrangements with providers of the various mortgage services. As it is, banks generally can't set up relationships with these providers without risk of being sued.

The borrower, armed with a more-reliable closing-cost figure and often with a promised interest rate from the get-go, would be equipped to compare lenders' offers and pick the best deal. In turn, lenders would compete by offering both lower closing costs and lower mortgage rates, HUD figures. Consumers try to shop around already, of course, but their efforts are foiled if the ultimate closing costs don't match the estimate or if they fail to lock in an interest rate right away.

When Bobby Mattappally, a software engineer in Seattle, went to refinance his $360,000 mortgage last summer, he received a good-faith estimate saying he wouldn't have to pay any costs at closing. The fees would be wrapped into the mortgage, and he would pay a slightly higher rate to cover them. But when he arrived at the closing table three months later, Mr. Mattappally says, he was presented with a statement with nearly $5,000 in charges. He walked away.

A single fee with no breakdown would suit him fine. "Who cares about all these things like the document-processing fee," Mr. Mattappally says. "Tell us what the total cost we will pay is and then do what is needed." The lender contends Mr. Mattappally kept changing his mind about what kind of loan he wanted.

HUD estimates its plan would save consumers an average of as much as $927 in fees per mortgage -- a total of $10.3 billion a year. But others worry about the control over the mortgage process that big banks would gain.

Their role in mortgage lending already is growing. The top five mortgage lenders, including Wells Fargo & Co. and J.P. Morgan Chase & Co., originated 51% of the nation's home loans in the first six months of 2003, compared with 27% in 1999, according to a publication called Inside Mortgage Finance. If the banks also compete to offer consumers lower closing costs, they'll pressure providers for lower prices. That $10.3 billion in potential savings has to come out of somebody's hide.

Real-estate agents worry that a bigger role for banks would reduce the control that agents exert throughout the home-buying process. That could make it harder for agents to ensure that home sales go through, and possibly make it harder for them to charge their traditional 6% commissions. These fees are already under attack as consumers learn to do more of the home-search process online.

Then there are the nation's 44,000 mortgage brokers, which originate loans on behalf of lenders. They worry that HUD's new system would make it tougher for them to compete; they wouldn't have the same leverage as the banks to negotiate discounts for mortgage services. In a worst-case scenario, they and some others argue, you could wind up with a handful of big banks dominating mortgage lending and not passing along their savings to consumers.

Despite all the criticism, many of the various players agree that the old system doesn't serve consumers well. It's based on the Real Estate Settlement Procedures Act, or Respa, passed in 1974. It was common then for real-estate agents, lenders and others to charge referral fees for giving each other business, or to grant business in return for favors such as free vacation trips.

Respa outlawed such deals. It also required lenders to provide mortgage applicants with an upfront "good faith estimate" of the closing fees they would pay. But it didn't have a mechanism to require lenders to stick to the estimates.

Industry and consumer groups, regulators and politicians have for more than a decade wrestled with ways to reshape these rules to prevent unhappy surprises. Their attempts have been always been stymied because any change would gore somebody's ox. Respa authorizes HUD to change the closing-cost rules if it follows certain procedures, such as doing studies of the economic impact.

Seeds for the latest effort at change were planted in the mid-1990s when former Rep. Rick Lazio of New York, who headed a housing subcommittee, called industry and consumer representatives together and asked them to help figure out a reform bill. A loose-knit working group began to meet, and a lobbyist for big lenders, Anne Canfield, pushed for allowing banks to bundle the myriad closing fees into a package. Consumer groups replied that for borrowers to benefit, the package would have to include an interest-rate guarantee. The difficulty of satisfying all of the industry's and consumer groups' interests kept them from achieving consensus.

The idea of a guaranteed mortgage package for consumers later was one recommendation of a 1998 report to Congress by the Federal Reserve Board and HUD. Finally, Respa reform found a new champion in Mr. Martinez, a Cuban-born trial lawyer whom George W. Bush plucked from Florida to head HUD.

Though some advisers cautioned him against tackling so divisive an issue, others encouraged him, among them the bank lobbyist Ms. Canfield. Mr. Martinez says he also won support from President Bush. After the secretary unveiled the plan in June 2002, banks and some consumer advocates hailed it and HUD officials hoped it would be wrapped up by early 2003.

Instead, it drew an outcry, some of the loudest criticism coming from the title-insurance industry. Its members provide assurance a property hasn't any hidden owners or other encumbrances. Amid the refinancing boom, title insurers' total revenue soared to a record $12.7 billion in 2002, according to credit-rating firm Fitch Inc. Fearing the HUD plan would pressure their fees, title insurers warned HUD they might sue to block it, going so far as to give the agency a draft of their legal brief. They contend HUD hasn't followed all the procedures prescribed for a rule change.

In case an overhaul goes through, title insurers want the guaranteed mortgage package to come in two parts. One, provided by lenders, would guarantee a price for various services that title insurers deem to be related to making the loan. The title insurers themselves could offer the second part, services they categorize as associated with the closing. This part would include their product.

The title industry is looking to thousands of title agents to make its case. Cara Detring, president of Preferred Land Title Co. in Farmington, Mo., says her office alone has sent about three-dozen letters to HUD. As past head of the title-insurance trade group, she has also made three lobbying trips to Washington. She targets key congressional panels, such as Rep. Manzullo's House Small Business Committee and the Senate Banking Committee, headed by Alabama Republican Richard Shelby -- who in private life is chairman of the Tuscaloosa Title Insurance Co.

Like Rep. Manzullo, Sen. Shelby is critical of HUD's proposal. His aides say this is no time to be fooling with the housing economic engine.

Lenders, though they generally support HUD's plan, have been arguing that an upfront interest-rate guarantee would be too onerous.

Consumer advocates, too, have found problems with the plan they initially supported. They fear that if banks stop providing itemized lists of settlement services, it will be harder for borrowers to sue lenders. They're particularly worried about subprime borrowers -- those with blemished credit -- who the advocates say are often less sophisticated and less able to shop for the best deals.

So HUD continues to struggle to find the right formula. It says it might push ahead with the proposed rule, though it has acknowledged it would have to amend the plan to accommodate some of the complaints. Or, the agency could take another route: Propose an entirely new rule -- which would start the whole process over again.

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