Will mortgage reform stall when proponent leaves Bush Cabinet?

WASHINGTON — What happens to pro-consumer mortgage settlement reforms when their chief proponent inside the Bush Cabinet heads home to Florida to run for a U.S. Senate seat?

That's a hot question as federal Housing Secretary Mel Martinez prepares to jump into the race for the Republican nomination in next year's election. On the surface, Martinez's departure would appear to be bad news for mortgage reform.

After all, industry critics and their Capitol Hill allies already have managed to delay the final rollout of Martinez's reform program by more than six months. With him out of the Cabinet, and President Bush heading into a rough re-election year, will there still be voices in high places to support Martinez's key proposals?

Two of the most important planks in his program:

Streamlining the entire home-finance system by allowing lenders and others to offer federally regulated fixed-fee, guaranteed-cost packages of interest rates and settlement charges. Consumers could shop and compare competing packages before signing up for the least costly alternative.

• Bringing certainty to so-called "good-faith estimates" of lender fees and settlement costs. Under the current system, estimates provided at application frequently lowball the true costs by hundreds or thousands of dollars. Home buyers often don't learn of surprise extra "junk fees" and inflated charges until the loan closing. Martinez's plan would end that game and require settlement-service providers to deliver close to their initial estimates.

Bush administration sources say the White House remains committed to streamlining and simplifying the home-mortgage settlement process. They decline to comment, however, on the final specifics or timing that might be associated with those reforms. But in the words of one official at the Department of Housing and Urban Development, "mortgage reform is still on" the agenda, whether Martinez is personally on the scene pushing for it or not.

Opponents of reform — especially title agencies, realty agents, mortgage brokers and settlement lawyers who stand to lose money under Martinez's fat-cutting plans — insist that they will immobilize or kill the reforms, in federal courts or on Capitol Hill.

What happens if they succeed? Will consumers be left with nothing better than the high-cost system they've got today? Not necessarily. A growing number of national mortgage companies and settlement-service providers is committed to delivering what consumer research surveys say home buyers and refinancers really want: simplicity, clarity and certainty in their financing transactions. They are moving ahead with their own private-label versions of Martinez's packaging reforms.

Large diversified settlement-service providers such as Fidelity National Financial Inc. and First American Financial Corp. are "bundling" discount-priced appraisal, credit, title, flood search, inspection and closing products to lenders who want to offer competitive guaranteed-cost packages to their customers now. Some of those lenders already have begun introducing innovative second-generation fixed-fee packages that allow borrowers to choose their own desired settlement cost totals.

For example, GMAC Mortgage's Ditech.com subsidiary, the 15th highest volume lender in the country, has just introduced a $395 "flat-fee" version of its popular guaranteed-cost, fixed-fee settlement package for refinancings. The $395 concept essentially covers typical lender-related closing expenses such as origination fee, escrow fee, appraisal, credit report, notary fees, lender title insurance policy, processing, document preparation and recordation. Other standard expenses such as government transfer taxes, prepaid interest, hazard insurance and mortgage insurance premiums aren't included.

Another option under Ditech's fixed-fee program is called the "rolldown." In this plan the lender pays all non-recurring settlement costs and the borrower spends nothing. But how can a lender pack what often costs thousands of dollars into a guaranteed fixed price of $395? Or zero?

Simple. They buy "bundled" services at discount costs. Then they let borrowers choose from one or more interest rate "bump" options — typically ranging from one-eighth to three-eighths of a percentage point over the lender's regular posted rate. Most of the bundled services are paid for through the slightly higher interest rate on the note, fully disclosed to the customer. Borrowers can opt for the packaged approach, choose their guaranteed settlement cost number and forget about last-minute surprises.

Other large mortgage lenders, including ABN-AMRO Mortgage Group, E-Trade Financial and E-Loan Inc., also are offering guaranteed-cost plans and racking up substantial loan volumes with the concept. ABN-AMRO, the country's sixth highest volume mortgage lender, says it has closed over 165,000 "one-fee" loans.

E-Trade's head of retail mortgage lending, Rob Bernabe, says single-fee, guaranteed packages "should be offered by every direct (mortgage) lender" in the country. That alone would eliminate much of consumers' concerns about junk fees and the bottom line costs of transactions.

"Consumers want to know two things," says Bernabe. "Tell me the rate and tell me what the closing number is. Two numbers. That's it. Why not?"

Good question.