Other intended reforms
The guaranteed-cost feature is just one element in federal Housing Secretary Mel Martinez's "Homebuyer Bill of Rights." Also included are significant changes to existing cost disclosures — the "good-faith estimates" that loan applicants receive three days after application — and mortgage brokers' fee disclosures.
Under regulatory proposals Martinez expects to release within two weeks, brokers would have to detail the compensation they receive from lenders and make clear that consumers have a range of choices connected with that compensation. A slightly higher rate on the loan — say a quarter-percent — could translate into sharply reduced or no closing costs. Though some brokers already explain their fees and closing-cost options to their customers, the new proposals would make this a standard procedure for the entire industry.
Brokers no longer could cloak the fees they receive from lenders with cryptic notations on the settlement sheet such as "YSP $3,900 (p.o.c.)." That translates to: "Yield Spread Premium $3,900 paid outside closing." Often in the past, however, these premiums were payments from lender to brokers for simply delivering borrowers at interest rates higher than the lender's lowest posted rate — without the borrower's knowledge and without closing-cost reductions.
How package concept works
Though the administration's forthcoming regulatory proposals are all designed to promote better consumer understanding of home-loan expenses, probably the most far-reaching will be the guaranteed-cost concept. In an interview last week, Federal Housing Administration Commissioner John Weicher explained how the plan would work in practice. A whole new category of service "packagers" will likely spring into being to serve lenders' competitive needs, said Weicher.
"The packager would have the ability to negotiate with service providers on their prices," he said, and then to pass discounts on to lenders vying for consumers' loan business. Since the bottom-line settlement quote would be guaranteed, "lenders or packagers would have to eat any unexpected increases," said Weicher.
A packager might contract with appraisers, who in exchange for a steady stream of assignments, would agree to lower appraisal fees. The same with title and escrow agencies, settlement attorneys, credit reporting agencies and all the other service providers associated with real-estate closings.
There could still be "junk fees" and padded costs in settlement charges, concedes Weicher. But now every marked-up expense would count against the lender's competitive interests.
"You could still say, 'I need 19 Federal Express shipments to close this loan,' you could throw whatever you like into the package," said Weicher. But such fat would now be visible upfront to consumers at the shopping stage, and would tend to drive away business.
To make national low-cost service contracts by packagers feasible, the new proposal would grant them a "safe harbor" from current federal rules that prohibit certain compensation arrangements among service providers. The guaranteed-cost approach would never be mandatory for either borrowers or lenders.
So lenders could offer consumers this choice: A full-cost guaranteed package with a locked interest rate; a guaranteed-cost package with a floating rate; or a rate quote with non-guaranteed "good-faith estimate" settlement costs. |
