When the Bush administration unveiled the full details of its "guaranteed mortgage package" plan last week, it sent shock waves through the home loan, title insurance, appraisal and other real estate settlement services industries.

The plan--designed to enable home buyers and borrowers to shop more intelligently for loans and to avoid surprise fees at settlement--would drastically change the way the mortgage business is conducted nationwide. Consumers who shop for loans under the proposal would receive an interest rate quote and a settlement cost quote at the initial stage of contact with a lender. Shoppers would be able to take each package quote and compare it with competing offers, and choose the best--without handing over any money until formal application.

The Bush plan, which will remain open for public comment through October 28, would save consumers more than $10 billion a year in loan fees and settlement charges, according to an economic impact estimate by the department of Housing and Urban Development (HUD), which authored the proposal. HUD is expected to be flooded with comments from affected industry groups over the next several months, and will then have to decide whether and how to proceed. The plan is not likely to take final effect until sometime in 2003 at the earliest, even if HUD adopted the plan in its current form late in 2002.

Even then, it may face legal challenges from groups who question whether HUD has the statutory authority to change the mortgage finance system so radically. The guaranteed mortgage plan would under no circumstances ever be mandatory. HUD says it will always simply be one option available to consumers and lenders. The agency contemplates a continuation of the current system of rate quotes and "good faith estimates"--with some modifications to improve accuracy--as a parallel option along with guaranteed mortgage plans.

But, even assuming the guarantee package concept takes effect, will consumers be attracted to it? Will they opt for it over the current system? If the experience of one large mortgage lender is any guide, the answer will be an emphatic yes. Ann Arbor, Michigan-based ABN-AMRO Mortgage Group, the fifth highest-volume mortgage originator in the U.S., began offering guaranteed-fee, guaranteed-rate-quote packages in 2001, and has already closed 45,000 of them.

Consumers "think this is definitely the way to go," said William Newman, ABN-AMRO excutive vice president. "People can't stand the idea of not knowing the bottom line" price tag when they apply for a home loan. Under ABN-AMRO's program, applicants at its Mortgage.com website receive an upfront rate quote plus a fixed-fee quote on settlement charges. The package quote costs nothing until the shopper formally applies for the guaranteed deal. That feature, says Newman, allows borrowers to "shop thoroughly and understand their options" before deciding on a choice.

The settlement package covers lender discount points, credit reports, appraisal, lender title insurance premiums, attorney fees, flood certifications, underwriting fees, processing costs and document preparation costs. Local property and transfer taxes, mortgage insurance premiums, prepaid interest and hazard insurance premiums are not part of the guaranteed package, but these items tend to vary little from lender to lender.

To offer its packages, ABN-AMRO has created a network of service providers around the country--appraisal management vendors, title insurance vendors, and others--whose prices are negotiated and fixed up front. Garth Graham, an ABN-AMRO senior vice president, says those fees are discounted--priced at wholesale, in effect--because of the substantial business volume the lender can dependably deliver to the participating service vendors.

HUD's plan looks similar to ABN-AMRO's in numerous respects, and in fact the company says it made a presentation to the agency while the government's guaranteed mortgage package concept was under development.

Published: August 5, 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, consumer 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.