Coming finance home

Byline: James P. Lucier, INSIGHT

If you are one of the millions of homeowners who have refinanced a mortgage in the last two years maybe not once, but perhaps twice or three times then you have done your bit to jump-start the economy and get it going again after the Clinton recession. Or if you are one of the many millions who have bought new homes in the same period, you have not only made the mortgage bankers happy, but also the realtors, the building trades, and the home-furnishings industry.

Indeed, new projections of the Mortgage Bankers Association (MBA), released late in January, foresee more of the same. Mortgage originations are expected to hit $1.99 trillion this year. "The year 2004 looks to be an exceptionally strong year, building on the gains of the last part of 2003, as the result of continued strength in employment and the housing market," says MBA chief economist Doug Duncan. "We see the job market getting even stronger, even with and in some cases due to the record gains in productivity, resulting in a positive impact on home purchases and mortgage originations."

This happy state of affairs comes to a head for each home buyer at the start of the process known as "the closing" or "the settlement." The clients sit down with an attorney or title-company agent while a succession of legal documents passes before their eyes, each page to be signed or initialed. When it is all done, the home buyers have three days to change their minds, and at least all the costs are laid out in black and white for them to examine at leisure.

Whether the new homeowners know it, they have just been through the guardian oversight of the U.S. Department of Housing and Urban Development (HUD) guidelines for the Real Estate Settlement Procedures Act (RESPA) of 1974. And even though the mortgage market ain't broke yet, and new homeowners are signing up in record numbers, HUD is determined to fix it.

Last year the then-secretary of HUD, Mel Martinez, said that changes were necessary to boost homeownership among minorities. He asserted that "the mortgage-finance process and the costs of closing remain major impediments to homeownership. Every day, Americans enter into mortgage loans ... without the clear and useful information they receive with most any other major purchase. This makes them vulnerable to predatory lending practices more often pushed on members of minority or elderly populations."

But HUD's proposed fix is raising an alarm. What was supposed to be a paperwork simplification has turned into a wholesale restructuring of mortgage banking that threatens competition and small business, according to Rep. Don Manzullo (R-Ill.), chairman of the House Small Business Committee. Manzullo says that the HUD proposal, if adopted, "will make fundamental, and perhaps irreversible, changes to the process that may undermine the long-term goals of providing affordable housing and consumer benefits within the residential real-estate market."

The committee chairman wants HUD to go back to the drawing board. The fear is that the big box banks, the Wal-Marts of the industry, will be the only institutions able to meet the new HUD requirements. "There are 13 major mortgage banks in America," says Rich Carter, spokesman for the committee. "The fear of just about every other institution in the mortgage business is that it will give the big banks total control over the home-buying process. It would allow them to lower the rate in the beginning."

Late last year, HUD sent its draft rules for RESPA to the Office of Management and Budget (OMB) for a final review. As soon as OMB reports back, HUD will send notification to the U.S. Congress that the deed is done and unveil its handiwork. Congress will have 60 days to object. But neither the public nor the banking industry yet knows what is in the new rules.

HUD spokesman Brian Sullivan tells Insight that "the marketplace will bring cost savings to a market that we believe is overpriced. We will save in the neighborhood of $7 billion to $8 billion. We think it will save consumers $700 per transaction." But if the market is overpriced it was not evident to Alan Greenspan, chairman of the Federal Reserve Board, when he praised the convention of the Independent Community Bankers Association last year. He referred to 2002 as "surely one of the most memorable years ever experienced by the home-mortgage market. Owing largely to the lowest mortgage interest rates in more than three decades and rising home prices, close to 10 million regular home mortgages were refinanced. ... The outsized dollar volume of these refinancings by our estimates, $1.75 trillion net of cash outs was an all-time record."

Nor did Greenspan think that the refinancing process was overly complicated. "Even as recently as the late 1980s, a family that wanted to use housing wealth to finance consumption would have faced an expensive and time-consuming process," he said. "Only in the last decade or so has secured borrowing against home equity become a cost-effective source of credit in a wide variety of circumstances."

Supposedly acting on a mandate to "simplify" the home-mortgage-settlement process (under the Economic Growth and Regulatory Paperwork Reduction Act of 1996), say critics, the draft rule put out for comment instead proposed drastic changes in the way the mortgage market functions. Instead of making a good-faith estimate to the borrower of each of the various services involved in finalizing a mortgage, the costs would be "bundled" into a lump-sum estimate with severe penalties if costs were higher.

Antikickback provisions of the present rule would be repealed for bundled transactions. Moreover, the bundler would have to guarantee a firm interest rate within three days after an application is received. Critics assert that, instead of saving the consumer money, the new rule eventually would cost more, since lenders would inflate the lump-sum estimate to make sure they didn't incur penalties. And the locking in of volatile interest rates so early in the process also would ensure that rates would be higher, not lower to protect lenders if the rate should rise.

The proposed bundling rule is supposed to enable consumers to shop for the best deal. But Michael Menzies, president and chief executive officer of Easton Bank, a community bank in the small town of Easton, Md., and president of the Independent Community Bankers of America, tells Insight that just the opposite will happen. "When the top lenders gang up and go to the appraisers, the termite inspectors, the flood-insurance providers and so forth, their work becomes a commodity rather than a service function. Is there no value added to have credentialed individuals perform these services with due diligence? If anything, the big mortgage lenders will be estimating some of the prices in the bundle, and uncertainty will become part of the price. And what happens if we commoditize the risk business, and that becomes the platform for Fannie Mae [the Federal National Mortgage Association] and Freddie Mac [the Federal Home Mortgage Corp.]? If they fail, the taxpayers will have to pick up the bill."

Ironically, HUD based its proposals upon a joint report to Congress in 1997 by the Federal Reserve Board and HUD itself. But the report stated categorically: "The agencies concluded that meaningful change could come only through legislation."

Now HUD takes the position that it has plenty of rule-making authority without going to Congress. "It has long been the policy that HUD has authority under the 1974 RESPA legislation," says Sullivan. "I don't think that there is any concern here in the department that we are straying beyond the statutory authority that we have." Indeed, Sullivan complains that the objections are coming from people who haven't seen the final rule. "They are reacting to it without seeing it," he says. Far from being a closed process, he insists, "there has been more public comment on this than the department has seen for any public rule that we have proposed. We read them all. We hosted more than 60 meetings with anyone who wanted to speak."

Yet the public's participation is limited to one-way communication. The actual decisionmaking all takes place outside of the democratic process a necessity, in Sullivan's view. "The history of RESPA reform has been littered with the bodies of well-intentioned reform movements. We had a reform group that met for nearly two years and could not come up with anything," Sullivan says. "Consensus is not possible. Leadership is required. What we want to do is strike a balance between the need to give consumers the info they need and the goal to create homeownership. We get there with leadership."

James P. Lucier is a senior editor for Insight.