When Mel Martinez bought a home in McLean, Va., two years ago, he was dismayed by the cost and complexity of closing on a $500,000 mortgage. Although a lawyer, he says, “I didn’t have a clue as to what I was signing.”
But he was starting a job where he could do something about it. As secretary of the Department of Housing and Urban Development, he proposed rules last year to simplify real estate closings and make it easier for consumers to shop for the best mortgage deal. The key change: Lenders would have to offer a more reliable estimate of closing costs when a borrower applied for a mortgage, and they’d have a strong incentive to guarantee the interest rate, too.
Millions of Americans have faced mortgage closings in recent years, either while buying homes or refinancing, as interest rates moved steadily lower until recently. For many, the experience is both baffling and frustrating. Borrowers regularly complain that even though they shopped diligently, they ended up paying more at closing than they expected, thanks to fees that ballooned or showed up only at the last minute.
Martinez wants to fix this by getting borrowers a clear view of all costs early on in the process, so they can shop effectively. He thinks this would lead lenders to offer lower costs in order to compete. A 1974 federal law gives him power to change the closing-cost system.
But one thing stands between him and his reform: the powerful real estate industry. Its various players collected a total of more than $50 billion in fees last year from people who bought or refinanced. Now, many of those who profit from the mortgage industry, including title insurers, mortgage brokers and real estate agents, feel threatened.
They worry that any broad change in the three-decade-old system can only shrink their piece of the pie, and probably make the pie itself smaller. They’re especially troubled now because the falloff in refinancing since interest rates turned up could hammer their profits.
Many are lobbying fiercely to kill or at least change HUD’s proposed overhaul. They wield a simple but potent argument: Don’t tamper with the housing market, one of the few true sources of strength in the U.S. economy. HUD replies that its plan not only wouldn’t upset mortgage lending but would make it simpler and cheaper.
Many providers of real estate services also fear the plan would give big banks greater control of the mortgage process, and the power to lean on all of the other players for discounts. Banks generally support the plan, although they, too, want some changes.
The debate has boiled over in Congress, where legislators urged on by industry lobbyists have railed against the plan. At a heated hearing in March, Rep. Don Manzullo (R-Ill.) called HUD’s economic analysis “appalling” and demanded that HUD witnesses tell him the impact on small business. That will be the first question they’ll face in a lawsuit, he said, so “pretend this is a deposition.”
HUD’s goals are both to force costs lower and to eliminate the closing-day surprise that angers borrowers, what many see as bait-and-switch tactics.
HUD’s proposal would give lenders two options. One is simply to provide a good-faith closing-cost estimate and stick to it. The second is to provide a “guaranteed mortgage package,” promising, at application time, both total closing costs and the interest rate. The rate could budge a little in certain cases.
The second option would require a greater upfront commitment from lenders. In return, they would be exempted from having to itemize closing costs. And they would be exempt from a 29-year-old kickback ban that effectively bars them from doing deals with other segments of the real estate industry.
If those exemptions don’t sound much like reforms, HUD has an explanation. It says they would enable banks to hold down closing costs by making arrangements with providers of the various mortgage services. As it is, banks generally can’t set up relationships with these providers without risk of being sued.
The borrower, armed with a more-reliable closing-cost figure and often with a promised interest rate from the get-go, would be equipped to compare lenders’ offers. In turn, lenders would compete by offering both lower closing costs and lower mortgage rates, HUD figures. Consumers try to shop around already, of course, but their efforts are foiled if the ultimate closing costs don’t match the estimate or if they fail to lock in an interest rate right away.
HUD estimates its plan would save consumers an average of as much as $927 in fees per mortgage — a total of $10.3 billion a year. But others worry about the control over the mortgage process that big banks would gain.
Real estate agents worry that a bigger role for banks would reduce the control that agents exert throughout the home-buying process, threatening their traditional 6 percent commissions.
Then there are the nation’s 44,000 mortgage brokers, which originate loans on behalf of lenders. One of their objections is a piece of the proposal that would change the way their compensation is disclosed. But they also worry HUD’s new system would make it tougher for them to compete; they wouldn’t have the same leverage as banks to negotiate discounts for mortgage services. In a worst-case scenario, they and some others argue, you could wind up with a handful of banks dominating mortgage lending and not passing along their savings.
Though some advisers cautioned Martinez against tackling so divisive an issue, others encouraged HUD, among them the bank lobbyist Canfield. Martinez says he also won support from President Bush. After the secretary unveiled the plan in June 2002, banks and some consumer advocates hailed it and HUD officials hoped it would be wrapped up by early 2003.
Instead, it drew an outcry, some of the loudest criticism coming from the title insurance industry. Its members provide assurance a property hasn’t any hidden owners or other encumbrances. Amid the refinancing boom, title insurers’ total revenue soared to a record $12.7 billion in 2002, according to credit-rating firm Fitch Inc. Fearing the HUD plan would pressure their fees, title insurers warned HUD they might sue to block it, going so far as to give the agency a draft of their legal brief.
In case an overhaul goes through, title insurers want the guaranteed mortgage package to come in two parts. One, provided by lenders, would guarantee a price for various services that title insurers deem to be related to making the loan. The title insurers themselves could offer the second part, services they categorize as associated with the closing. This part would include their product.
The title industry is looking to thousands of title agents to make its case. Cara Detring, president of Preferred Land Title Co. in Farmington, Mo., says her office alone has sent about three dozen letters to HUD. She targets key congressional panels, such as Manzullo’s House Small Business Committee and the Senate Banking Committee, headed by Richard Shelby (R-Ala.) — who in private life is chairman of the Tuscaloosa Title Insurance Co.
Lenders, though they generally support HUD’s plan, have been arguing that an upfront interest-rate guarantee would be too onerous.
So HUD continues to struggle to find the right formula. It says it might push ahead with the proposed rule, though it has acknowledged it would have to amend the plan to accommodate some of the complaints. Or, the agency could propose an entirely new rule — which would start the whole process over again.
