Two recent threats—HUD’s proposed change to the regulations under the Real Estate Settlement Procedures Act (RESPA) and the continuing misinformation put out by Radian Guaranty saying its mortgage impairment product is cheaper and provides as much protection as title insurance—have created one of the most challenging eras in memory for the title insurance industry. This article will focus on HUD’s proposed changes to the closing process and the potential impact on our industry if it is adopted in final form unchanged. For an update on the Radian issue, see the accompanying sidebar.
SIDEBAR TO COVER STORY:
Radian Continues to Spread Incorrect Cost-Savings
On the Radian front, ALTA® continues to win its legal effort to show that while a company can call its re-financing product a lien impairment protection product, if it looks, sounds and works like title insurance, it is title insurance. Regardless, companies must be licensed and regulated to sell title insurance and Radian Guaranty does not have the license.
The departments of insurance in six states have ruled in response to ALTA® efforts that the Radian product is title insurance masquerading as something else. Since Radian is not qualified to sell title insurance, it cannot sell its product in those states. Illinois is the only state so far that has decided to allow Radian’s product.
However, the CA Department of Insurance issued a cease and desist order to Radian and said that if Radian wants to continue to offer its mortgage insurance products in California, then it has to stop marketing the Lien Protection Product in all 50 states. As a result, Radian Guaranty says it has stopped selling its lien impairment product everywhere and will concentrate on “changing the rules” through state legislatures to allow it to be sold legally.
Radian, however, continues to mesmerize even knowledgeable real estate industry observers with promises of huge savings over traditional title insurance, which lenders can pass along to their consumers. The claim is “several hundreds of dollars” per closing and a cumulative savings of three billion dollars! The much more boring truth is this: Lenders and homeowners can enjoy the benefits of full-strength title insurance, including lien clearance, for less money than the Radian gimmick for most re-financing in most states.
On a $100,000 loan, true title insurance would cost less than Radian’s $325 flat rate in 36 states. On a $150,000 loan, title insurance would be less expensive in 28 states. The key, of course, is obtaining a re-issue or other discount rate for title insurance when re-financing. ALTA® strongly urges title companies to recommend these discounts to re-fi customers in all instances where sound underwriting principles allow their use.
The real issue is why would any lender be interested in the Radian product? Sure, it might save the lenders’ applicants a few dollars—not the hundreds of dollars as Radian claims—and, yes, the odds of a title defect on a re-fi may be less than in a transfer of title. But the Radian product provides no protection at all to the lender on an average-size re-fi mortgage. The Radian policy protects a pool of loans not individual loans and that protection amounts to .5%—that’s one-half of one percent—coverage for the entire pool of loans.
In a pool of 10 million dollars in mortgages, a single title problem resulting in a loss would mean that the lender could only recover up to $50,000 from the “insurer.” There may not be many losses in a re-fi pool, but it would only take one prior failure to prevent the mortgage holder of a second title in the same pool to receive nothing in the event of a title failure. And, the fact is, title defects do occur in re-financing, though perhaps not at the same 25% rate of occurrences discovered and corrected in routine property transfer title searches.
The Radian policy would not provide any protection for the lender or homeowner from legal costs to defend the title in case of defects or problems with the title. The cost of defense is typically 35-40% of claim amounts. So, the real question for lenders is this: How do you think the homeowner is going to feel about his mortgage company making her pay $325 for “protection” against liens and getting nothing for it in the event even a minor title issue arises?
We know that typically title insurance is not needed or issued on home equity loans or second mortgages. Radian claims that it could save three billion dollars in the aggregate on re- fi’s, second mortgages, and home equity loans compared to title insurance. ALTA® counters that the entire title insurance business, including transfers of residential property and commercial transactions only amount to less than ten billion dollars annually. To save three billion dollars on the re-financing of the business would require title insurance companies to charge nothing on those policies.
HUD Secretary Mel Martinez bought a house in the Washington, DC, metropolitan area last year and was surprised by the complicated process. Consequently, he has pledged to make the home-buying process easier for consumers. HUD is publicizing this effort as the “Homebuyer Bill of Rights;” however, what the proposal is mainly talking about is reforming the regulatory requirements under RESPA.
HUD proposes that lenders offer consumers a flat-rate price for settlement services so they can compare that charge with other lenders, much like they now compare interest rates. HUD says this new process will provide greater choice for the home buyer in shopping for lower cost mortgages and settlement services. On first glance it sounds good for the consumer. But when you look at the intricacies of how it will be implemented, you find it will be detrimental to the title industry, Realtors®, real estate attorneys, small-sized lenders, and, in purchase/sale transactions, to consumers.
In looking at the HUD proposal, ALTA® has “concerns about the lack of consumer choice in selecting settlement service providers when packages are used,” according to James R. Maher, ALTA®’s executive vice president. From a public policy perspective ALTA® has “substantial questions regarding HUD’s statutory authority for certain aspects of the proposal,” he added.
The New Rule
The proposed HUD rule is complicated. There are a number of ambiguities in it. The proposal abandons the regulations and Good Faith Estimate (GFE) form that have been used for almost three decades to implement RESPA Section 5(c) (which requires lenders to provide loan applicants with a “good faith estimate” of “charges for particular settlement services”) and replaces it with two radically new regulatory “regimes” and disclosure forms: 1) a new Good Faith Estimate (GFE) regime, which consolidates guaranteed prices into categories, and 2) the Guaranteed Mortgage Package Agreement (GMPA) regime, under which borrowers would be offered a guaranteed single price for all settlement costs along with a loan at a guaranteed interest rate. Although the two regimes are similar in many ways, prices, payments, and arrangements between lenders who offer GMPAs and providers of services in the package would be exempt from RESPA Section 8 scrutiny, whereas Section 8 would continue to apply to the new GFE regime. (A more in-depth look at these regimes is at the end of this article, or you can download an analysis of the rule from ALTA®’s home page.)
HUD’s proposal appears to allow anyone to offer these GMPAs. However because the package must include a loan at a guaranteed interest rate, it is questionable—if not unlikely —that anyone other than lenders would be in a position to effectively offer them to consumers.
To induce lenders and others to offer these packages, HUD is offering two carrots: As mentioned above, (1) an exemption from RESPA Section 8 for payments and prices relating to the package and to the services included in the package, and (2) elimination of the need to disclose what services are being offered or included in the package. Two enticing carrots.
The proposed packaging alternative would actually provide substantially less information to the home buyer. The fact that the lender does not need to disclose what services are, or are not, included in the package creates an even greater problem for consumers who seek to shop for these services—something HUD very much wants to encourage.
And, you know that in some parts of the country it is the seller who pays for all or part of the closing costs. HUD’s proposal would not allow that seller any choice in the selection of vendors, since they are being selected by the lender on behalf of the buyer. So the seller is completely left out of the equation. It is also unclear whether the buyer may wind up paying for costs that the seller previously had to bear.
The proposal could greatly diminish the role of Realtors® in the closing process and could threaten the continued participation of small mortgage lenders by making it even more difficult for them to compete with major mortgage lenders. And if large national and regional lenders find it more efficient to deal with fewer and bigger providers of settlement services, smaller title insurers or agents may be adversely affected. Many observers find it hard to appreciate how this decline in competition would translate into lower mortgage prices for home buyers.
The National Association of REALTORS (NAR) has yet to make official comments to HUD, but NAR supports the preservation of the current RESPA rules and opposes any broad regulatory relief for lenders who can package services today without the exemption from Section 8. NAR’s historic position has been that there is no evidence that such a regulatory exemption will result in lower costs to the consumer. Like ALTA®, NAR supports improved disclosures to ensure consumers have the information necessary to make informed decisions. Both trade associations have traditionally recommended that any changes to RESPA be done in a slow and deliberative process. The complexity of the marketplace and the uncertainty of future technology should be considered in any reform proposals. If the HUD proposal is implemented in final form, major money-center banks could dominate all parts of the residential property transaction in many metro areas, from buying to financing to closing.
The Mortgage Bankers Association of America has taken a position supporting HUD’s initiative. Other financial trade organizations—the American Banking Association and the Consumers Bankers Association—are expected to endorse the effort as well, though it is not at all clear that HUD’s proposed rule change would benefit any but the largest financial institutions. That should give pause to community banks and local mortgage companies because the mortgage lending business is already a rapidly consolidating one. In the past five years the market share of the top ten originators of residential mortgages has doubled from 25% to “control upward of 50%,” according to American Banker.
Several points are obvious, however. It would be foolish for anyone to oppose an initiative under an umbrella called the “Homebuyer Bill of Rights.” That would be like being against motherhood, apple pie, and the American way. Further, the stated objectives of HUD’s thrust coincide with ALTA®’s long-standing positions. The devil, as they say, is in the details, and there are a lot of details to this wholesale revision of RESPA toward packaged or bundled closing costs.
The current U.S. system for the transfer and finance of residential real estate is the envy of the world for its efficiency, security, and low cost for home buyers. Clearly, it’s not broke, but that doesn’t mean the closing process can’t be improved with an eye toward making the American dream of homeownership even more accessible to low-income, minority home buyers, which is HUD’s stated objective. The trick is to make sure that changes accomplish their intended purpose and do not backfire with unintended consequences.
ALTA®’s official position on packaging of settlement services has always been to support “settlement services legislation or regulations that promote consumer choice and empowerment and require meaningful disclosure.” ALTA® also recognizes that the consumer has “a separate benefit or interest in the selection of the product or service and the pricing of each component in the package.”
ALTA® and other interested parties have an obligation to comment on the details of the proposed rule change. Interested parties have until October 28, 2002, to comment on the proposed changes. ALTA® urges members to inform themselves on this issue and express their views on the proposed changes. If you would like to submit comments, send them in writing to: Rules Docket Clerk, Office of General Counsel, Room 10276, Department of Housing and Urban Development, 451 Seventh Street, S.W., Washington, D.C. 20410-0500.
Many observers see the HUD rule change initiative as an attempt to accomplish through regulatory reform what it was not able to achieve through Congress.
The two options in HUD’s current proposed RESPA rule change are summarized separately (below) from an analysis prepared for ALTA® by Sheldon E. Hochberg of Steptoe & Johnson LLP, Washington.
The Revised Good Faith Estimate Process
One of HUD’s regimes is the revised Good Faith Estimate process. Within three days of receiving (even orally) an application containing the most basic information, a lender must give the applicant a revised GFE form. This new form would contain the essential financial cost data (interest rate, APR, monthly payment), and also estimates of the aggregate total amounts to be paid by the borrower for each specified category of settlement charges.
Seven categories of estimates encompass charges now found in the 800, 1000, 1100, 1200 and 1300 series on the HUD-1 form. The interest rate may change during the 30-day validity period according to the lender’s normal loan underwriting, but the charges in each category of settlement services cannot change (unless dependent on the interest rate). In other words, the estimates are not estimates at all; most amounts cannot be exceeded at closing. Only charges that fall into the categories of services required by the lender where the borrower may shop for a provider (the 800 and 1000 series) or reserve or escrow for insurance and property taxes (1000 series) may exceed estimates by 10%.
With regard to title-related services, the lender’s estimate must apparently include all charges, except for owner’s title insurance, that would be in the 1100 series, not just the charges made and kept by the title company—including fees, even attorney’s fees, wire transfers, and deliveries.
The regulations appear to assume that a single provider performs all of the title-related services because the lender is required to indicate on the GFE form whether the services are “lender-selected” or “borrower-selected.” In real life, some providers may be selected by the home buyer, others by the lender.
But the interesting part is that the charges for each of the seven categories would be shown in a lump sum, not individual itemized costs. On the other hand, the lender would have to attach an itemized breakdown of the title insurance premium and the amount of charges “for title and settlement agent services, including any commissions for title insurance.” HUD apparently believes that if the total amount of title agent compensation is disclosed to the borrower, she will be in a better position to negotiate lower charges.
The new GFE regime would still be subject to RESPA Section 8, which means that all costs, including any negotiated discounts, etc., must be passed along to the home buyer without any mark-up. Lenders could not require the use of an affiliated title company. There is no enforcement penalty other than a complete refund for all fees and charges if the cost at settlement exceeds the GFE, “absent unforeseeable and extraordinary circumstances.”
The New Guaranteed Mortgage Package Agreement (GMPA)
The other HUD regime is the GMPA. Under this option, any entity offering a GMPA must provide, at no charge, a signed GMPA in the form specified by HUD within three days of receiving an application. The form offers: 1. A mortgage commitment, subject to final underwriting and appraisal, at a “guaranteed” interest rate for 30 days that can only increase based on a verifiable index or other appropriate measure 2. A Guaranteed Mortgage Package (GMP) at a single price that includes all lender charges; all third-party charges for services required by the lender; all title and closing-related charges, including loan title insurance (if any) but not optional owner’s title insurance, and all charges required to complete the loan (recording fees, taxes, etc.); and advises the home buyer if the lender anticipates including a pest inspection, loan title insurance policy, a credit report and/or an appraisal in the package. The form commits the GMPA provider to give a copy of any such reports to the home buyer.
The GMPA provider must indicate whether the GMP portion of the package includes the last four enumerated items or not, but it does not require the provider to disclose what other individual services are included in the package or the specific cost of those services. You will probably want to reread the preceding sentence to make sure you read it correctly the first time. The Homebuyer Bill of Rights, as proposed, comes with a startling lack of consumer disclosure. How could the home buyer know if the lender’s package includes title or closing services that she has separately agreed to with the seller to purchase from another source? Would she be paying for such services as part of the package that the seller has already agreed to pay for (which is the custom in many parts of the country)?
Any payments, discounts, things of value, or markups that the GMPA packager can negotiate are exempt from RESPA Section 8 scrutiny. Because of that exemption, any savings need not be passed along to the home buyer. So, any volume pressure that a packager may exert can be used to increase the packager’s bottom line, subject only to competitive market pressures. Finally, any or all of the services may be provided by an affiliated business and that affiliation need not be disclosed to the applicant.
Two points are clear. First, while in theory HUD’s proposal appears to allow anyone, even a title agent, to offer a GMPA, the requirement that the package include a loan at a guaranteed interest rate effectively precludes anyone other than lenders from being able to put packages together. (On the other hand, multiple providers could compete to package the GMP part of a GMPA if the GMP could be severed from the loan.) Second, clearly lenders are going to find the GMPA option more appealing from a profitability standpoint than the revised GFE.
Pete Boisseau is president of Boisseau Evans & Associates, Inc., Richmond, VA, one of ALTA®’s public relations firms.