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"Guaranteed-Cost Settlement Package" Concept At Core Of Settlement Reform Plan

by Kenneth R. Harney

At the core of the home real estate settlement reforms proposed last week by the Bush administration is an idea that could literally transform the way millions of home buyers and refinancers shop for mortgages: Guaranteed-price closing cost packages.

As outlined by Housing secretary Mel R. Martinez, mortgage shoppers would get the option of comparing not just interest quotes from competing lenders, but guaranteed bottom-line "bundles" of settlement fees as well. A shopper might call one mortgage company and be quoted 7 1/4 percent with a guaranteed settlement fee package of $4,500. A second lender might quote 7 percent with $3,900 in fees. And a third might offer 7 percent with $4,200.

With that information up front--and guaranteed at closing--a borrower could shop among competing lenders for the best deal with full confidence that there would be no last-minute surprise fees on the closing statement.

The guaranteed-fee idea is part of a series of regulatory proposals that include detailed disclosures of mortgage broker fees and and improvements to the "Good Faith Estimates" disclosure that home loan borrowers receive from lenders three days after application. Martinez described the proposals broadly at a National Press Club briefing last Wednesday.

But Federal Housing commissioner John C. Weicher provided much more detail about the guaranteed-fee plan in a separate interview with me last week. According to Weicher, the new system will be:

Optional for lenders and home buyers alike. Lenders will be able to decide on their own whether they quote mortgages solely on the basis of interest rates or as part of a guaranteed rate-plus-settlement cost package. Some lenders are likely to offer both options to shoppers.

Inclusive of all or most of the typical fees that currently are enumerated on the HUD-1 settlement sheet. Though the final regulatory language is not yet available publicly, the presumption is that services such as title, flood certification, document prep,appraisal, credit, "points" and other lender fees, settlement agency charges, etc. will all be constituent parts of the "bundle" of services quoted and guaranteed.

Targeted directly at eliminating padded and marked-up settlement services. But Weicher admitted that guaranteed-price packages would probably not eliminate overcharges entirely, only make them more costly in competitive terms to lenders and title agents who might be tempted to load fat into their charges to consumers. In other words, lenders competing with each on the basis of rate-plus-settlement package quotes would be motivated to cut out the fat up front--and keep their closing expenses lean.

One key to the plan is a "safe harbor" for lenders quoted fixed-price settlements. Under the regulations still to be issued, lenders guaranteeing fees would be exempted from current federal legal restrictions on compensation arrangements among settlement service providers. The entire Martinez reform proposal is expected to be published in the Federal Register within the next two weeks and undergo a three month public comment period before final adoption late this year.

Published: July 1, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation.

He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.

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