The Real Deal New York

Ken Harney – Mortgage system reform, take two

Fed tries again to push through settlement improvements, limit scams
By Ken Harney | March 31, 2008 11:47AM

Almost anyone who’s bought a house or taken out a mortgage in recent years knows the problems:

• Lenders’ “good-faith estimates” of loan and settlement fees provided at application too often are off the mark. Eleventh-hour surprise charges can add hundreds or even thousands of dollars to consumers’ bottom-line costs at closing. No federal regulation requires strict adherence to the estimates, and no government agency pursues lenders who fraudulently lowball their estimates to pull in more business.

• The whole process of obtaining a mortgage lacks transparency, and loan features are often confusing to consumers or are never explained by lenders and brokers. That confusion, in turn, is a key reason why so many borrowers now find themselves locked into bad loans they never understood in the first place.

• There is too much pressure to use lending, title and settlement service affiliates of the builder or realty broker. Builders, for example, sometimes dangle $10,000 to $30,000 worth of “incentives” in front of purchasers, but only if they’ll use the builder’s affiliated lender, where mortgage rates and fees frequently are higher than elsewhere.

These and other problems are targets of a new, sweeping effort by federal authorities to reform the system with better disclosures and a crackdown on scammers. It’s actually the Bush administration’s second try to push through settlement improvements. An earlier effort in 2002 was hounded by lending, realty and title industry critics and withdrawn.

The latest effort, outlined March 14 by officials at the Department of Housing and Urban Development, would transform the good-faith estimate into a comparison-shopping tool, force lenders to guarantee that their estimates are on the money, and walk borrowers step-by-step through closing procedures with a new consumer-friendly “script” for settlement and escrow agents nationwide.

Among the key changes you can expect if the proposal is adopted after HUD’s 60-day public comment period:

• A new, nationally uniform four-page good-faith estimate that is laid out graphically to highlight all the key working features of a loan, including rate, points, origination fees, prepayment penalties, potential payment increases, escrows, title insurance and closing charges by category. The form then prompts applicants to take the lender’s estimates and compare them with estimates provided by up to three competitors.

The new disclosures were tested by focus-group researchers who found that they enabled consumers to pick the “best” loan deal — lowest rate, lowest total fees and most advantageous terms — 90 percent of the time.

• Strict limits on variations between upfront cost estimates at the application stage and the final charges that appear on the settlement sheet. Certain costs controlled by lenders could not increase from the application to the closing, absent tightly defined “unforeseeable” circumstances such as wars or disasters. Total settlement fees could never be more than 10 percent higher.

• All fees paid to mortgage brokers tied to the interest rate must be disclosed and labeled as a “credit” to the borrower. This is intended to red-flag extra payments that brokers and some loan officers receive for steering applicants into higher note rate deals. At the same time, though, the rule change allows cash-short borrowers to pay for closing costs with a slightly higher mortgage interest rate.

• Incentive packages marketed by builders and others that effectively pressure consumers to use affiliated companies — but don’t deliver true economic benefits or discounts — could violate the law under the new proposals. For example, if a builder incorporates “incentives” into the selling prices of homes but requires use of affiliated mortgage, title and settlement agencies to obtain those illusory savings, this would violate the rules.

On the other hand, incentives and discounts that are real — where buying a package of mortgage, title and other services costs much less than they would if purchased individually — would still be permitted.

The reform proposals were greeted with statements of approval from major lending groups, but some critics said they will require extensive and costly changes in the mortgage and settlement services industries.

Washington attorney Phillip Schulman of K & L Gates, who represents title, mortgage and settlement clients, called HUD’s proposal “complicated, confusing and controversial,” and predicted tough opposition from industry groups. Brian Montgomery, assistant secretary for housing, disagreed, saying, “The timing is right. There is a lot of anguish out there.”

Ken Harney is a real estate columnist with the Washington Post.

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