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Proposal lets buyers shop mortgage fees

WASHINGTON — Do you take one package of fees with your home mortgage? Or would you prefer two?

Strange as they may sound, those questions could become routine for home buyers and refinancers in the months ahead. Top housing officials in the Bush administration are considering proposals for home loan reform under which you could shop for not just one fixed-price package of mortgage charges, but an entirely separate add-on package that would guarantee all your settlement fees.

The fixed-price packages would replace today's widely criticized system that often forces borrowers to go to settlement with no idea of their bottom-line final costs.

The two-package approach, proposed by realty brokerage and title industry groups, represents a departure from the original "single fee" mortgage reform plan outlined by Housing Secretary Mel Martinez last year. He envisioned a radically simplified mortgage marketplace in which consumers could shop not only for an interest rate quote but a companion guaranteed fixed-price settlement fee package as well.

Under Martinez's original plan, for example, you might get a quote from Ajax Home Loans with the following terms: An interest rate of 6-1/4 percent for 30 years, plus a single-fee, guaranteed package of settlement costs for $3,800.

You could then shop Ajax's package quote against competitors. ABC Home Finance might offer you 6-3/8 percent with $4,200 in settlement fees — way out of the ballpark. A third lender might guarantee 6-1/4 percent with $3,400 in fees.

You'd probably opt for the last — the lowest-price combination of rate and settlement charges. More important, there'd be no 11th-hour fees allowed.

Martinez's streamlined reform plan promised even more than certainty: By encouraging lenders to compete for your business with lower-priced settlement costs, Martinez said, the single-fee concept would squeeze the fat out of real estate settlements — reducing the average cost of closings nationwide by almost $1,000 per transaction.

But Martinez's cost-cutting ideas upset entrenched and powerful players in the real estate field, especially title insurance agents, closing attorneys and realty brokers. They argued that the Martinez plan would put too much power into the hands of lenders by encouraging them to dictate prices to title agencies and affiliated small businesses.

They proposed an alternative plan: a modification of the single-fee concept that would allow the realty brokerage and title insurance industries independence from lenders' packages. Under their proposal, a home buyer would be offered two distinct guaranteed-price deals in connection with a mortgage: first, a "lender package" consisting of an interest-rate commitment plus a fixed fee covering all lender-related costs (discount points, credit reports, appraisal, underwriting and document preparation). And second, a separately marketed "guaranteed settlement package" that would include title search, title insurance, tax service, notary, survey, legal, courier and title-related document preparation.

The settlement package could be put together by a title agency or a real estate brokerage company or home builder with title and settlement company affiliates. The point, say proponents, is that a dual-package approach would allow companies specialized in settlement-related functions — as opposed to mortgage originations — to compete independently for customers.

So, for example, you might get a $2,400 guaranteed settlement-cost package quote from the realty agent you use to buy your house. You could shop that quote with competing title agencies or settlement firms hoping to lure you in with lower prices.

At the same time, you might shop for the lowest-rate loan-cost package from mortgage lenders online and offline. In the end, you might take your realty agent's guaranteed settlement-fee package and an online lender's guaranteed origination cost package.

But would the two-package approach simplify transactions? Would it save you money? Consumer and lender groups argue that it wouldn't be streamlined enough, and it would leave too much fat in the system. Proponents of the dual package approach say that's nonsense and that head-to-head competition among settlement cost packagers would inevitably lead to lower prices.

Where is all this headed? Martinez and top officials at the Department of Housing and Urban Development aren't saying where they come out on dual packages. Nor will they say when the final reform proposals will be announced and put into action.

But there's a distinct possibility that the administration could opt for a Solomonic, free-market compromise: allow the coexistence of lender-controlled single-fee packages along with agent and title company-controlled settlement packages.

Let consumers — the real market — decide which concept works better. One package or two?