Will industry’s bid to reform loan fees work?

Do you take one package of fees with your home mortgage? Or would you prefer two?

Those questions could become routine for home buyers and refinancers in the months ahead. Top housing officials in the Bush administration are considering home loan reforms that would allow you to shop for a fixed-price package of mortgage charges and a separate add-on package that would guarantee settlement fees.

The fixed-price packages would replace today’s widely criticized system that often causes borrowers to go to settlement with no idea of their final costs.

The two-package approach, proposed by realty brokerage and title industry groups, represents a departure from the “single fee” mortgage reform plan outlined by Housing Secretary Mel Martinez last year.

He envisioned a radically simplified mortgage marketplace in which consumers could shop for an interest rate quote and a companion guaranteed fixed-price settlement fee package as well.

Under Martinez’s original plan, for example, you might get a quote with an interest rate of 6 1/4% for 30 years, plus a single-fee guaranteed package of settlement costs for $3,800.

You could then shop that package quote. A second lender might offer you 6 3/8% with $4,200 in settlement fees. A third might guarantee 6 1/4% with $3,400 in fees.

You’d probably opt for the last, the lowest-price combination of rate and settlement charges. More important, there’d be no 11th-hour fees allowed.

Martinez’s streamlined reform plan promised even more than certainty: By encouraging lenders to compete for your business with lower-priced settlement costs, he said, the single-fee concept would squeeze the fat out of real estate settlements, reducing the average cost of closings nationwide by almost $1,000 per transaction.

But Martinez’s cost-cutting concept upset entrenched and powerful players in the real estate field, especially title insurance agents, closing attorneys and realty brokers.

They argued that the plan would put too much power into the hands of lenders by encouraging them to dictate prices to title agencies and affiliated small businesses.

Under their alternative proposal, a buyer would be offered two distinct guaranteed-price deals: a “lender package” consisting of an interest rate commitment plus a fixed fee covering all lender-related costs (discount points, credit reports, appraisal, underwriting and document preparation) and a separately marketed “guaranteed settlement package” that would include title search, title insurance, tax service, notary, survey, legal, courier and title-related document preparation.

The settlement package could be put together by a title agency or a real estate brokerage company or builder with title and settlement company affiliates.

Proponents say the dual-package approach would allow companies specializing in settlement-related functions, as opposed to mortgage originations, to compete independently for customers.

For example, you might get a $2,400 guaranteed settlement-cost package quote from the realty agent you use to buy your house.

You could shop that quote with competing title agencies or settlement firms hoping to lure you in with lower prices.

At the same time, you might shop for the lowest-rate loan-cost package from mortgage lenders online and offline, and you might accept the realty agent’s guaranteed settlement-fee package and an online lender’s guaranteed origination cost package.

Consumer and lender groups arguethe two-package approach wouldn’t be streamlined enough and would leave too much fat in the system.

Proponents say that’s nonsense and that head-to-head competition among settlement cost packagers would inevitably lead to lower prices.

Where is all this headed? Martinez and top officials at the Department of Housing and Urban Development aren’t saying where they stand on dual packages. Nor will the officials say when the final reform proposals will be announced and put into action.

But there’s a distinct possibility that the administration could opt for a Solomonic free-market compromise: Allow the coexistence of lender-controlled single-fee packages along with agent and title company-controlled settlement packages.

Let consumers -- the real market -- decide which concept works better. One package or two?