HUD’s Empty Reforms

Regarding “Proposed Closing-Cost Reforms Come Under Fire” by Kenneth R. Harney, Aug. 11:

Ethical mortgage originators have been anxiously awaiting HUD’s closing-cost reform package. The preliminary report was issued recently for public comment.

The proposal promises rewards for consumers that it won’t ever deliver, still allows opportunities for unethical originators to abuse their clients, and creates a new opportunity for lenders to make money at the consumers’ expense.

First, HUD promises $16 billion in savings to consumers. With 10 million loans originated annually, that amounts to $1,600 per transaction. That far exceeds the entire profit of all settlement providers in the average transaction, and it is a totally unrealistic possibility.

Second, mortgage brokers have always had to spell out their fees on the Good Faith Estimate, but HUD does not have enough staff to investigate abuses, so there are no penalties for lying.

The new regulations propose that they spell out the maximum fee they can charge, but that might be well in excess of what they might expect to charge.

A broker could still list its maximum fee as, say, 2 points while telling the customer verbally, “That’s just what we put on the form, but we normally charge only 1 point.” The broker could then gouge the customer by charging 1.5 points but still be in compliance with the regulations.

Third, a guaranteed closing-cost package is a joke. Other settlement providers are regulated too, such as title insurance companies, whose fee structures are approved by the California Department of Insurance.

Consumers already have that portion of the package regulated. Under the regulations, lenders will be able, under the guise of providing a guaranteed package, to mark up the costs of other providers, a practice now forbidden.

To avoid being subjected to abuses, borrowers should become educated about the process so they better understand their choices. Armed with knowledge, they can then search for an ethical provider.

Finally, it is possible to enter into a contract with a mortgage broker who commits to a specific fee, not a maximum, for services. Then ask the broker and lender to specify their fees to the escrow company so it can prepare an estimated closing statement.

RANDY JOHNSON

Newport Beach

The writer is a mortgage broker and author.