HUD 'Fix' Likely to Hurt Home Buyers; A supposed simplification of the U.S. mortgage-finance process drastically could alter how the mortgage market functions, leading to an increase in costs for consumers

0 Comments | Insight on the News, March 1, 2004

Supposedly acting on a mandate to "simplify" the home-mortgage-settlement process (under the Economic Growth and Regulatory Paperwork Reduction Act of 1996), say critics, the draft rule put out for comment instead proposed drastic changes in the way the mortgage market functions. Instead of making a good-faith estimate to the borrower of each of the various services involved in finalizing a mortgage, the costs would be "bundled" into a lump-sum estimate with severe penalties if costs were higher.

Antikickback provisions of the present rule would be repealed for bundled transactions. Moreover, the bundler would have to guarantee a firm interest rate within three days after an application is received. Critics assert that, instead of saving the consumer money, the new rule eventually would cost more, since lenders would inflate the lump-sum estimate to make sure they didn't incur penalties. And the locking in of volatile interest rates so early in the process also would ensure that rates would be higher, not lower to protect lenders if the rate should rise.

The proposed bundling rule is supposed to enable consumers to shop for the best deal. But Michael Menzies, president and chief executive officer of Easton Bank, a community bank in the small town of Easton, Md., and president of the Independent Community Bankers of America, tells Insight that just the opposite will happen. "When the top lenders gang up and go to the appraisers, the termite inspectors, the flood-insurance providers and so forth, their work becomes a commodity rather than a service function. Is there no value added to have credentialed individuals perform these services with due diligence? If anything, the big mortgage lenders will be estimating some of the prices in the bundle, and uncertainty will become part of the price. And what happens if we commoditize the risk business, and that becomes the platform for Fannie Mae [the Federal National Mortgage Association] and Freddie Mac [the Federal Home Mortgage Corp.]? If they fail, the taxpayers will have to pick up the bill."

Ironically, HUD based its proposals upon a joint report to Congress in 1997 by the Federal Reserve Board and HUD itself. But the report stated categorically: "The agencies concluded that meaningful change could come only through legislation."

Now HUD takes the position that it has plenty of rule-making authority without going to Congress. "It has long been the policy that HUD has authority under the 1974 RESPA legislation," says Sullivan. "I don't think that there is any concern here in the department that we are straying beyond the statutory authority that we have." Indeed, Sullivan complains that the objections are coming from people who haven't seen the final rule. "They are reacting to it without seeing it," he says. Far from being a closed process, he insists, "there has been more public comment on this than the department has seen for any public rule that we have proposed. We read them all. We hosted more than 60 meetings with anyone who wanted to speak."