The dark side of real estate bundling
August 5, 2004
Packaged services bad for consumers, consultant argues
By Samantha Peterson
Everett Ives doesn't mince words about his dislike of real estate bundling. He believes that instead of helping consumers as it's purported to do, bundling mortgage and closing services actually hurts them.
"It's used as a tool to steal, and more particularly a tool to trap the borrower," said Ives, a Texas-based consultant to mortgage brokers and bankers. He is actively involved with the Texas Association of Mortgage Brokers.
Bundling real estate services is the process of combining fees for credit reports, title reports and other items needed to close a mortgage. Many large lenders and settlement companies started bundling services as a way to offer borrowers a one-stop-shop experience when closing their home purchase.
Ives' comments came after he took issue with a recent Inman News story covering a bundling panel at Real Estate Connect 2004. He pointed out that the three people who spoke were simply "out selling their wares." Speakers on the panel included Bob Sullivan with ABN AMRO, Bill Rayburn with FNC and Joe Tyrrell with Ellie Mae. They said bundling services can reduce consumers' loan costs and streamline the entire process.
The topic of bundling has been a constant source of controversy in the real estate industry since the U.S. Department of Housing and Urban Development in 2002 proposed a rule that would have changed the Real Estate Settlement Procedures Act to permit the sale of guaranteed-price bundled packages of mortgages and mortgage-related services. Many industry groups, including mortgage brokers, spoke out against the proposed changes.
Tyrell said mortgage brokers opposed the RESPA changes primarily because they were against the idea of bundling being forced on them through regulation.
Ives, however, sees the issue differently. He said mortgage brokers opposed the changes because they would have complicated and confused the settlement process. Consumers would have been less informed, not more informed.
He said the proposal, which HUD withdrew in March, would have expanded the Good Faith Estimate from one page to three and require mortgage brokers to credit the yield spread premium to the borrower and increase their fees to receive the same compensation as a mortgage banker. It also would have opened the door to bundling or packaging of settlement services, he said.
And bundling, Ives said, sounds nice in theory, but harms the consumer in practice. By offering bundled services, large lenders can create another company and manage the settlement service provider. The lender then could receive discounts on services, such as appraisals, but not pass along the savings to consumers.
"They're not passing these services at a discount, they're passing them along at the retail value," Ives said.
And because consumers would receive all their services for one fee through one provider, they likely wouldn't look around on their own for the best deal. That's why Ives calls bundling "a trick, a tool to keep the borrower from shopping" around. With bundling, consumers could be held to a more expensive transaction than they could get without it, he said.
Some comments from a recent Inman News poll support Ives' contention. While many respondents mentioned they believe bundling is good for consumers, others disagreed. They said bundling would make consumers vulnerable, and that bundling services is not in consumers' best interest.
"They continue to be in the interest of the mega companies that offer them," wrote one respondent.
Others wrote that bundled services would not save consumers money and that lenders would consume any savings generated from bundling.
Many of the respondents, however, wrote that consumers want a one-stop shopping experience. Bundling supporters often mention the one-stop-shop desire when they advocate bundled services.
Ives challenges proponents to name one consumer who's requested bundling. It's easy to ask consumers whether they'd like one-stop shopping for home buying and receive the response bundling supporters want.
"I could probably get 98 percent of people to say yes to that question," Ives said.
But the validity of the answer comes back to the original question. If someone asked consumers an open-ended question about what they thought would make the real estate transaction smoother, "I guarantee that bundling of services would not appear one time," Ives said.
Mortgage brokers haven't ruled out the idea of supporting bundled services, but certain conditions would need to be met, Ives said. Those would include:
- All of the savings in the negotiated prices by the actual provider are passed along to the consumer with no management, administration or other costs added.
- The consumer is free to opt out of any component of the bundle, with no penalty or loss of benefit suffered.
- The bundles would be "transportable" from one investor to another. Otherwise, if a loan were declined and moved to another investor, the borrower would have to start over with a new credit report, appraisal, survey, pest inspection, etc., which would increase costs, not reduce them.
- The "kick-back" provisions must apply to bundled services. "One of the key reasons that bundles are so attractive to some of the very large lenders is that bundles would be exempt from the kickback or referral fee prohibition and the payment of referral fees and other compensation that is otherwise illegal would be permitted between the participants of the bundle," Ives said.
"I would say don't just ask for bundling, ask for the savings that bundling generates to be passed on to the consumer," Ives said. "Before you jump on the bundling bandwagon, ask yourself who's going to profit from this and then decide if you like bundling or not."
Copyright: Inman News Features
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