The long knives are coming out on Capitol Hill to kill or delay the Bush administration's plans to cut costs drastically in the American home mortgage settlement system. But the chief congressional opponents to the proposals turn out have deep financial and professional ties to the very settlement industries that would be forced to cut fees as a result of the proposed changes.

The congressional attacks are focused on HUD secretary Mel Martinez's plans to reform the 30-year-old Real Estate Settlement Procedures Act (RESPA). Among the key reforms: allowing mortgage lenders and others to offer home buyers guaranteed-price “packages” of interest rates and settlement fees. The packages would provide bottom-line certainty to home buyers and refinancers about the total costs of competing loan options, in stark contrast to the current system where eleventh-hour increases of hundreds or thousands of dollars in settlement fees are commonplace.

The Martinez proposals would create the packaging conept solely as an option--nobody would be forced to use or offer the plan. But the theory underpinning the concept--that competition would force down the prices charged by title insurance, escrow, legal, appraisal and other service providers--has many settlement-related companies upset.

Martinez estimates that the average home mortgage settlement bill would decrease by almost $1,000 under the packaging plan, and American borrowers would save an aggregate $10 billion a year through lower fees.

Washington-based trade groups representing industries that would be most directly affected by these revenue reductions have been Martinez's most vocal critics. Recently a series of congressional hearings have also spotlighted the success of these trade lobbies in assembling a small but powerful group of legislators to help derail the Martinez plans before consumers get to use them.

Most controversial of all has been Sen. Richard Shelby (R-AL), chairman of the Senate Banking, Housing and Urban Affairs committee. Shelby has objected strenuously to the reform plan's negative impacts on local settlement firms, calling it “significantly damaging to small businesses.” He has asked Martinez to delay the proposal indefinitely; Martinez had planned to release his final version this spring.

But Shelby's opposition is now coming under fire for potential conflicts of interest. While Shelby is chairman of the banking committee, he is simultaneously chairman of the board of Tuscaloosa Title Insurance Co., of Tuscaloosa, AL, a position that earns him between $115,000 and $1,050,000 a year, according to his most recent federal financial filing. The same filing estimates his holdings in Tuscaloosa Title to be worth between $1 million and $5 million.

Shelby never mentioned his title agency holdings in recent banking committee hearings on the settlement reforms, but Capitol Hill ethics critics took note. For example, Larry Noble, executive director of the Center for Responsive Politics, a nonpartisan, nonprofit group that studies political finances, called Shelby's role as an opponent of settlement reforms “outrageous. It is an apparent conflict of interest” for him to be standing in the way of consumer reforms that could cut revenues for his firm, said Noble.

But Shelby's office released a statement defending his actions:

“HUD's proposals would have a wide-ranging and significant impact on the homeownership process across America. It is completely appropriate, indeed incumbent,upon Sen. Shelby to participate in such a debate.”

The reform proposal's chief opponent in the House of Representatives also brings a settlement industry perspective to his legislative duties. Rep. Donald A. Manzullo (R-IL), chairman of the House Small Business Committee, was a real estate settlement attorney before coming to Congress.In his most recent campaign he received a $7,000 contribution from the American Land Title Association, the title industry's principal lobby on Capitol Hill. He has pledged to introduce legislation to kill Martinez's settlement-cost cutting plans if an when they are put into action.

Published: April 28, 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.