A growing number of mortgage companies are choosing not to wait for federal reforms of home mortgage settlement rules expected this spring. They are plunging into the market instead with their own consumer-friendly "guaranteed settlement cost packages" designed to take the uncertainty out of loan closings.

Last week, Irvine, California-based Greenlight Financial Services joined the guaranteed-cost bandwagon with a "flat fee refi" package of $995 for any conventional home mortgage refinancing up to $322,700 virtually anywhere in the U.S.

Greenlight’s one-size-fits-all breakthrough puts it shoulder to shoulder with major lenders such as ABN-AMRO Mortgage Corp, GMAC Mortgage, Ditech.com, and E-Loan Inc. that already offer guaranteed settlement cost options.

With the packaging concept, a loan applicant receives not only an interest rate quote up front, but a bottom-line fixed-fee guarantee on closing costs. The idea is to avoid one of the most persistent consumer complaints about the traditional home mortgage process--unpredictable settlement fees.

Thousands of consumers have complained to the Department of Housing and Urban Development (HUD)--and to state attorneys general--about settlement cost shock. Typically an applicant will be quoted certain"good faith estimates" on closing fees three days after application. But their actual, final HUD-1 settlement sheet weeks later might contain hundreds or thousands of dollars in unexpected charges, forcing them to dig deeper to swing the transaction.

Current federal law mandates good faith estimate disclosures shortly after application. However, it does not require lenders or settlement service providers to actually stand by and deliver those estimates. To respond to popular demands for greater certainty about settlement fees, HUD secretary Mel R. Martinez last year proposed creation of federal "guaranteed mortgage package agrements" whereby lenders would be forced to charge no higher fees than those quoted to applicants up front, along with the interest rate.

HUD plans to release its final guaranteed package rules before this summer. A congressional hearing on the packaging concept and other reforms is scheduled for tomorrow on Capitol Hill, featuring presentations by mortgage and consumer groups.

Greenlight’s new flat-fee $995 concept could trigger a price war among mortgage lenders looking to pull in refinancing business. With rates hitting historic lows again last week, according to Freddie Mac, a fixed-fee guarantee below $1,000--covering title search and insurance, appraisal, escrow and notary charges--could put pressure on competing firms to rein in their fees.

Mortgage brokers are plunging into the fast-moving packaging trend as well. Wisconsin-based Fairway Independent Mortgage, with 53 offices around the country, has begun switching to fixed-fee packages as a service to customers.

"People don’t want to gamble with ‘good faith estimates’ anymore," says Fairway president Steve Jacobson. "They just want to know the bottom line"--long before the final closing.

Published: February 24, 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, 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.