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The Honolulu Advertiser

Posted on: Thursday, June 12, 2003

Mortgage settlement surprises common

By Thomas A. Fogarty
USA Today

Not all mortgage loan settlements go as poorly as Vinny Worley's. But many do.

Check in hand, Worley went to a law office to close on a new home in Wilmington, Del. Only when the lawyer's assistant slid the settlement summary across the table did he learn he was $1,800 short.

It was the classic settlement table surprise — the too-frequent chaotic climax of the biggest, most complicated type of business deal the typical American ever undertakes. Surging home sales and serial waves of refinancings have made such surprises routine.

Americans last year closed on 16.9 million mortgage loans, paying an estimated $80 billion in settlement costs. Record low interest rates this year have unleashed a wave of mortgage business that is expected to swamp last year's numbers.

Across the USA, tales of botched settlements have become standard chatter at cocktail parties and backyard barbecues.

Responding to widespread dissatisfaction, the Bush administration last year proposed rule changes that would simplify mortgage deals and transform the way the industry operates.

The key change would encourage lenders to offer loan applicants upfront a single guaranteed price for closing the transaction. For lenders willing to do business on that basis, the government would eliminate the thicket of regulations that now make it impractical.

Supporters say improved efficiency from the pending changes would squeeze up to $1,000 from average closing costs. They would also permit borrowers to comparison shop for the first time on the basis of just two numbers — interest rate and the fixed closing cost.

But if the proposal is to become reality, the administration will have to bull its way through opposition from tens of thousands of small mortgage-related businesses that have a financial stake in the way business now gets done.

In Worley's case, the lender and the settlement attorney had overlooked a local transaction tax. Worley eventually was permitted to close the deal with a personal check on a separate account intended as a reserve for the new home.

It wasn't just the extra expense, but the sheer sloppiness of the transaction that offended Worley, 33, an electrical engineer and self-described fanatic for orderliness.

"There ought to be a way to be precise about the numbers ahead of time," he says.

Settlement surprises can result from plain incompetence or honest misunderstandings. Or they can be fraud by any of the many players needed to close a deal.

Mel Martinez, secretary of the Department of Housing and Urban Development, has been the most vocal advocate for making the single guaranteed fee the industry model.

Martinez last summer proposed changing federal rules to permit lenders to offer what HUD calls "guaranteed mortgage packages." In return for offering such deals, lenders would be freed from burdensome disclosure requirements at settlement time.

The proposed rules also aim to settle one of the most contentious issues in the current process — compensation for mortgage brokers. Few borrowers understand that a broker commonly gets paid by the lender for delivering customers willing to pay a higher-than-market interest rate. The Martinez proposal calls for spelling out for borrowers terms of broker compensation.

HUD officials estimate that proposed changes could squeeze about 20 percent from the cost of mortgage settlements — $16 billion on the basis of 2002 business volumes. Much of the savings would come from regulatory changes that would permit lenders to seek volume discounts from service providers, such as appraisers and title companies. Under current interpretations, such discounts are thought to violate the anti-kickback provisions of the 1974 law.

HUD issued the preliminary rules for comment last summer. The agency's draft of final rules must pass review by the Office of Management and Budget. The final version could be issued this summer, officials say.

Brokers, title companies, settlement attorneys, appraisers and others who draw fees from the current way of doing business say all of the proposed savings from Martinez's proposal will come from their fees. During a recent HUD comment period, opponents unleashed 40,000 complaints.

Martinez says the savings from the proposed rules will come from everyone in the industry, not just the small fry. By their nature, says Martinez, real estate transactions will always be local, assuring a place for small local businesses that provide closing services.