Mortgage closing costs can be bundled, keeping costs low
By HOLDEN LEWIS
When Peter Mensonides shopped for a mortgage, he needed the closing costs to be as low as possible to avoid mortgage insurance. He wanted an accurate estimate of those fees.
He got his wishes: The lender guaranteed most of the settlement costs at $995 when Mensonides bought a house in 2003 in Stockton, Calif.
"And I must say, the word 'guarantee' did stand out," Mensonides says, "since not many other lenders I looked at explicitly mentioned any guarantee to their costs."
His lender, E-Trade Mortgage, bundled the credit report, processing, underwriting, tax service, document preparations, administration, wire transfer, flood certificate, reconveyance and messenger charges into a single-fee package. Only a few items were excluded: title insurance and fees for the appraisal, escrow and notary. He got a rebate for the $995 at closing.
A few years ago, it was hard to find a lender that would charge a guaranteed flat fee for so many settlement services. Things began to change in 2002 when the federal housing department proposed a sweeping regulatory reform of the mortgage settlement process. The Department of Housing and Urban Development wanted to eliminate the all-too-common practice by lenders of underestimating closing costs, then springing the true, higher fees on unwary borrowers at the last hour.
A law called the Real Estate Settlement Procedures Act, or RESPA, requires lenders to itemize all the services performed, from the credit report to title insurance. As part of the reform proposal, HUD offered to let lenders bundle services together, without itemizing them, if they would charge one guaranteed fee.
The government withdrew the reform proposal this year in response to complaints from the mortgage, title and real estate industries. By that time, the industry already had laid the groundwork for bundling services. Now many lenders see the packaging of settlement services as a way to control costs. Others spy a marketing opportunity, too.
"Nobody chooses complexity and uncertainty," says Garth Graham, president of ABN AMRO Mortgage Group, which offers a settlement package called OneFee that is the cornerstone of its retail marketing effort.
Graham says the vast majority of the company's retail customers choose OneFee, which includes all services, including title insurance, and excludes only taxes, hazard and mortgage insurance, prepaid interest, and money to fund escrow accounts.
It's neither easy nor cheap to bundle all the charges into one fee, Graham says, and that's a minor reason that only a few lenders offer single-fee bundled services. Among these lenders are ABN AMRO, E-Trade, E-Loan and ditech.com.
Other lenders don't charge customers a guaranteed flat fee, but they buy bundles of services at a discount and pass along the savings. Online lender Amerisave does this when it buys settlement services from title giant First American, says Dave Herpers, Amerisave's chief marketing officer.
"For example, instead of selling us four products at $20 apiece for $80 total, they're selling one bundled product for $70," Herpers says. RESPA requires lenders to pass on exact costs, "so that $70 is passed onto the consumer, so the consumer saves $10 because of the bundled approach."
There are two major reasons why only a few lenders have embraced the packaging of settlement services for a single, guaranteed fee. First, in home purchases, many powerful interests are grabbing slices of the financial pie. These are the same interests -- Realtors, title insurers and mortgage brokers -- who complained the loudest about RESPA reform and succeeded in scuttling it.
"When somebody buys a home or gets a mortgage for a refinance, there are quite a few decisions being made behind the scenes -- what we like to call the locomotive that pulls the transactional train," says Anthony Hsieh, president of HomeLoanCenter.com. "Usually, the real estate agent pulls this locomotive. Consumers don't know which escrow companies, home inspectors and title insurance companies to deal with. Usually, all these decisions are being made by the Realtor."
The second reason that bundled services haven't caught on is that settlement customs vary widely, not only state to state, but county to county.
In some places, closings are done in attorney's offices; in other places, closings are done at title agencies. In some places, the seller pays for the lender's title insurance; in other places, the buyer pays for it.
"You have an overlay of real estate customs and practices that may have to be adapted in a bundling environment," says James Dufficy, vice president and regulatory counsel for First American Corp., a title insurer that has begun to offer bundled services to lenders.