Get ready, get set for “guaranteed mortgage packages”--the centerpiece of the Bush administration’s upcoming final reform rules on closing costs.

The rules, delayed by Capitol Hill criticism that they might harm small businesses such as title and settlement companies, are now expected to be issued by the Fall.

How will guaranteed packages work in practice? Think about this: When you apply for a new home mortgage or a refinancing today, you get an interest rate quote from the lender, plus--three days after application--a “Good Faith Estimate” of settlement charges. But your final costs may well be $1,000, $2,000 or more higher than those in the good faith estimate disclosure.

No federal or state law requires the lender to deliver settlement costs in the amounts stated in the estimates, and thousands of American home buyers routinely get hit with unexpected fees at closing, according to federal housing secretary Mel R. Martinez.

Martinez’s forthcoming solution? Let lenders and others compete for mortgage applicants’ business by offering fixed-fee, prepackaged settlement costs along with interest rate quotes. The fees would be “guaranteed”--they could not exceed the quoted amount by even a dollar.

Say you were buying a $200,000 house and you needed a $160,000 first mortgage. In the forthcoming guaranteed packaging marketplace, you’d be able to shop on the basis of locked-in rates and settlement charges.

Ajax Mortgage might quote you a 30-year fixed interest rate of 5.5 percent with a settlement-cost package “not to exceed” $2,800. (The package would contain everything you need to obtain and close the loan, from credit and appraisal charges to title insurance. It would not contain hazard insurance or mortgage insurance premiums.)

Ajax’s competitor, TipTop Mortgage, might quote you the same interest rate, but a guaranteed closing package that totals $400 less.

Your choice would be easy. More importantly, you’d have no fear of last-minute surprise fees at settlement, no matter which lender you picked.

If the guaranteed package reforms work as expected in a competitive marketplace, according to HUD officials, the total cost of settlement fees could decrease by an average $1,000 per loan nationwide. Lenders who routinely larded so-called “junk fees” for “administration,” “processing,” and other alleged services would be forced to squeeze such fat out of their loan deals.

HUD officials confirmed last week that the department has “had communications” with the White House Office of Management and Budget (OMB) on the final shape of the settlement reforms. Among the reported possible options--a concession to title industry critics--is a “dual package” concept that would separate loan origination-related fees from title and settlement-related fees. Consumers presumably could get a guaranteed loan origination fee package from their lender and a separate, fixed-fee settlement-services package from a title or escrow agency, thereby allowing title agencies to remain independent of lender controls.

HUD sources emphasize that any packaging plan would be optional, never mandatory. If you as a consumer, realty agent, or lender prefer the present system of loan closing, you’ll still be able to direct your business to lenders who offer that approach. But if you want certainty on closing costs, you’ll probably opt to shop for guaranteed fees along with your rate quotes.

Get used to the idea: Not only is packaging coming to your market, it may already be there. That’s because dozens of mortgage companies, and hundreds of individual mortgage brokers, already have introduced their own versions of the Martinez packaging plan in anticipation of the official start of the reforms later in the year. The best-known national mortgage firms include ABN-Amro Mortgage Group, E-Trade Mortgage, E-Loan Mortgage, Ditech.com, GMAC Mortgage Corp. and Greenlight Financial Services.

A group of 30 independent mortgage companies, known as America’s Mortgage Cooperative, launched its own bulk-purchasing and guaranteed package settlement cost program in June. Brokers nationwide are now offering packages to consumers, working through Interfirst Wholesale Lending, an ABN-Amro affiliate. In barely a few months, those brokers have generated $100 million in guaranteed fee settlement cost packages, according to the company.

Shop around. You’ll probably be able to compare competing packages right now, and save money in the process.

Published: July 14, 2003

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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.