Coming clean on mortgage costs

As homeowners and buyers beat down the doors of mortgage companies this summer, many of them thought as they signed what seemed like reams of loan documents - and got billed for each one - that there has got to be a better way.

Well, there is. It's not the law of the land yet, but in an admission that the current system isn't working very well, the US Department of Housing and Urban Development is trying to make the home-mortgage process more comprehensible.

"Right now the forms are very difficult for borrowers to understand," Stergios Theologides, executive vice president of New Century Financial Group, says of the documents that all lenders must by law provide borrowers.

The form is actually in two parts, an early guess at costs, called a Good Faith Estimate, and a final document, called a HUD-1, that sometimes is presented to homebuyers just hours before their loan is to close. In either case, these HUD-mandated papers show the borrower what he or she will pay for a laundry list of charges that include loan origination and discount fees, title searches, credit reports, even termite inspections.

The problem lies in what happens between the first and last documents, as the numbers can - and do - swing wildly. The Good Faith Estimate is merely that, and there is no requirement that it be anywhere near the numbers of that show up on the HUD-1.

When Martha Gonzalez bought her first house in Miami four years ago, she thought the financing deal looked good on paper. Just 24 hours before closing, however, she learned that the good faith estimate the lender had provided had overlooked most of the property taxes owed. The estimate was so far off, she and her husband had to bring an extra $2,500 to the settlement table.

"It was a bad experience," says Ms. Gonzalez, that forced her to borrow money at the last minute and made her wary of the entire mortgage process.

She later obtained a second mortgage. This time, she says the process was trouble free, but still complicated. "I'd like to see something change.... The more I go through this, the more ambiguity I see."

Borrowers have the right to back out of a deal if the HUD-1 is off by such a wide margin, but if you've already sold your house, and the moving van is waiting to cart you to your new digs, the pressure is on to accept the deal.

"The settlement table is the last place to learn that you owe hundreds or perhaps thousands of dollars more," says Brian Sullivan, a HUD spokesman. The mortgage-making process as it now stands is, Mr. Sullivan says, "too confusing, too unclear, and too expensive."

So HUD Secretary Mel Martinez has proposed to overhaul the Real Estate Settlement Procedures Act, or RESPA, which spells out what needs to be disclosed on the Good Faith Estimate and HUD-1. Reform would not eliminate any of the many steps that mortgage companies take in preparing a loan, but it would force lenders to make their final cost figures estimates deviate less from the first estimates.

Mr. Martinez envisions RESPA reform taking two big swipes at clarifying mortgage numbers. The first would be an "enhanced" Good Faith Estimate, which would still list all of the fees involved but would accept less deviation between preliminary and final numbers. The other change would be the Guaranteed Mortgage Package, or GMP, which boils down all those numbers to a single bottom-line figure that is set for a predetermined number of days. Consumers could choose one or the other.

Many lenders say they believe borrowers would prefer the GMP and its simplicity. They note that a big bonus to GMP is that it gives consumers a single number that they then can compare prices among competing lenders.

Brad Scriber, of the Consumer Federation of America, says that as it now stands, borrowers can shop around only for the best deal on interest rates.

"But that's only half the picture," he says. The other half, closing costs, can run into the thousands of dollars but consumers currently have no effective way to compare one lender's fees against another's.

To adopt either proposal, RESPA needs to be changed to ease current restrictions against lenders getting together with mortgage service providers to set prices. Lenders say that if they are to held strictly accountable for the numbers they present to clients, they have to be able to bargain with the title-inspection company, for instance, to lock in a price that's as good on the final day as the first day of the loan-making process.

While consumer and banking groups generally have said they are in favor of the reforms, some worry that small lenders will be put at a disadvantage because they may not have the clout of a big mortgage company to set prices with vendors. Others worry that the guaranteed mortgage package discloses too little information.

At the Heritage Foundation, Shane Ham, a senior policy analyst, gives the proposal "two thumbs up."

"It gives disclosure in a way that people can understand the numbers," says Mr. Ham. And he sees as a fair trade-off the easing of antikickback rules as long as lenders agree to give accurate numbers.

Accuracy should also lead to better pricing. HUD's Mr. Sullivan estimates that Americans could save $700-$1,000 per transaction if mortgagemakers were allowed to bargain with the companies that supply them with their data and documents.

Ahead of the HUD curve, one major mortgage lender, ABN Amro, already has implemented its own version of a guaranteed price contract and says that they're on average $563 cheaper than traditionally documented loans. And they're 25 percent speedier, according to ABN Amro executive Garth Graham, a senior vice president at ABM Amro Mortgage Group.

Mr. Graham says that ABM Amro's Guaranteed OneFee mortgage, which has HUD approval, has been able to identify a lot of inefficiencies in the mortgage-making process. Surveys by his company, which has made more than 100,000 of these loans so far, indicate to Mr. Graham that consumers want simplicity and a guarantee.

HUD has no time line on enacting RESPA reform. Ham says companies that stand to give up $10 billion or so a year aren't anxious to see simplified mortgage lending take hold anytime soon.

Homebuyers who have been victims of hard to spot loan-settlement scams are getting a helping hand. The Bush administration and the Department of Housing and Urban Development (HUD) in recent weeks announced plans to track down and prosecute perpetrators of settlement-cost abuses, which they say have become rampant.

"Homeowners have been easy marks for unscrupulous real estate, title, and mortgage brokerages that run kickback schemes involving fictional fees," says Richard Roll, president of the American Homeowners Association (AHA).

HUD recently reached settlement agreements with four companies alleged to have been actively engaged in the abuses.

One of the problems, according to Mr. Roll, is that homebuyers frequently pay closing or settlement costs without inspecting the paperwork closely. Unless buyers are paying attention it's easy to overlook an additional fee from a possibly bogus title-insurance company that is providing no real service.

Also, buyers are too easily steered toward a particular mortgage broker or title company, Roll noted, without realizing the existence of a kickback or referral-fee arrangement, let alone the possibility that a bogus charge on their settlement sheet could be financing the whole scheme.

Roll's advice for spotting a settlement scam includes:

• Get a written statement of all settlement costs in advance.

• Inspect settlement documents closely for something called "affiliated business" connections among appraisers, realty agents, mortgage brokers or title companies.

• Ask questions about any fees charged by a firm you don't recognize.

• Contact HUD, if you suspect you've been a victim. Write to HUD, Attn: RESPA, Room 9146, 451 Seventh St. SW, Washington, D.C., 20410.

- American Homeowners Association