Check in hand, Worley went to a law office to close on a new home in Wilmington, Del. Only when the lawyer's assistant slid the settlement summary across the table did he learn he was $1,800 short.
It was the classic settlement table surprise — the too-frequent chaotic climax of the biggest, most complicated type of business deal the typical American ever undertakes. Surging home sales and serial waves of refinancings have made such surprises routine.
Last year, Americans closed on 16.9 million mortgage loans and paid an estimated $80 billion in settlement costs. Record low interest rates this year have unleashed a wave of mortgage business that is expected to swamp last year's numbers. Across the USA, tales of botched settlements have become standard chatter at cocktail parties and backyard barbecues.
Responding to widespread dissatisfaction, the Bush administration last year proposed rule changes that would simplify mortgage deals and transform the way the industry operates.
The key change would encourage lenders to offer loan applicants upfront a single guaranteed price for closing the transaction. For lenders willing to do business on that basis, the government would eliminate the thicket of regulations that now make it impractical.
Supporters say improved efficiency from the pending changes would squeeze up to $1,000 from average closing costs. The changes also would let borrowers comparison shop for the first time on the basis of just two numbers: interest rate and the fixed closing cost.
But if the proposal is to become reality, the administration will have to bull its way through opposition from tens of thousands of small mortgage-related businesses that have a financial stake in the way business gets done.
In Worley's case, the lender and the settlement attorney had overlooked a local transaction tax. Worley eventually was permitted to close the deal with a personal check on a separate account intended as a reserve for the new home.
It wasn't just the extra expense but the sheer sloppiness of the transaction that offended Worley, 33, an electrical engineer and a self-described fanatic for orderliness. "There ought to be a way to be precise about the numbers ahead of time," he says.
Settlement surprises can result from plain incompetence or honest misunderstandings. Or they can be fraud by any of the many players needed to close a deal.
John Courson, chairman of the Mortgage Bankers Association of America and a supporter of reform, told Congress this year that the complexity of the mortgage deal today is "an invitation of bait-and-switch."
Regulatory thicket
When Congress in 1974 enacted the law that governs real estate closings, a key objective was outlawing then-common kickbacks: lavish gifts and cash from lenders, title insurers, settlement agents, home inspectors and other industry players to real estate agents in return for delivering clients. The law also required extensive written disclosures so borrowers would know who was being paid what for services related to closing the mortgage.
Over time, the industry has successfully pushed government to ease the original anti-kickback provisions. Now, key players such as real estate agents and mortgage bankers can steer customers to related service providers if the link is spelled out in writing.
Critics say changes in the law over the years have produced a confusing jumble that does more to confuse borrowers than to protect them. Borrowers are not so much enlightened by the blizzard of mandatory disclosures as buried in them, critics say.
"Disclosures have so much information that they're meaningless to most customers," says Ira Rheingold, director of the National Association of Consumer Advocates.
How the law now fails to protect:
• Lenders must provide loan applicants with a "good faith" estimate of closing costs early in the process. However, they are largely free to ignore their own numbers.
• Borrowers have a legal right to see their settlement sheet — the document that itemizes all the costs — a day before closing, but few know to demand it.
• Borrowers can cancel the loan for refinancing up to three days after settlement. It is rarely done because it means starting the painful borrowing process over and possibly increasing the interest rate. In a purchase, the borrower has no comparable cancellation right.
Not just a problem for novices
The uninitiated aren't the only ones vulnerable.
As chief of realty franchiser Century 21, Van Davis is an expert in home finance. Yet when he went to settle on a purchase of a new home in Morristown, N.J., last year, costs were $3,000 more than estimated, the result mainly of a title insurance charge far in excess of what had been estimated.
Nina Simon, an attorney who represents mortgage borrowers in her job at senior-citizen advocate AARP, initially refused to settle a recent refinancing on her home in suburban Washington, D.C. The issue: An appraisal estimated at $400 was listed at settlement for $500.
Several lenders are trying to capitalize on borrower dissatisfaction. Some roll into one fee their discount points — upfront money that buys down the interest rate — and the array of profit-boosting administrative fees common in mortgage lending.
Dutch-owned ABN Amro has gone a big step beyond that. It rolls into one guaranteed fee not only the charges for its own services but those of third-party providers: appraisers, title insurers, surveyors, closing agents and the like. The only expenses to borrowers falling outside ABN Amro's guaranteed price are daily interest, mortgage taxes and pre-payments for property taxes and home insurance premiums.
Company executive Garth Graham says ABN Amro decided two years ago to guarantee one price to boost its Internet lending arm, Mortgage.com. Market research showed a recurring theme: Borrowers were frustrated and angry with ever-changing terms.
"The thing they always came back to was 'Just give me a single fee,' " Graham says.
The single-fee model
Mel Martinez, secretary of the Department of Housing and Urban Development, has been the most vocal advocate for making the single guaranteed fee the industry model.
Last summer, Martinez proposed changing federal rules to permit lenders to offer what HUD calls "guaranteed mortgage packages." In return for offering such deals, lenders would be freed from burdensome disclosure requirements at settlement time.
Under the proposal, lenders who opt not to provide an upfront guarantee of closing costs would have to close the deal within 10% of the prices that they quote in the good-faith estimate issued to the borrower at application.
The proposed rule also aims to settle one of the most contentious issues in the current process: compensation for mortgage brokers.
Squeezing out savings
Few borrowers understand that a broker commonly is paid by the lender for delivering customers who are willing to pay a higher-than-market interest rate. The Martinez proposal calls for spelling out for borrowers the terms of broker compensation.
HUD officials estimate that proposed changes could squeeze about 20% from the cost of mortgage settlements — $16 billion on the basis of 2002 business volumes. Much of the savings would come from regulatory changes that would permit lenders to seek volume discounts from service providers, such as appraisers and title companies. Under current interpretations, such discounts are thought to violate the anti-kickback provisions of the 1974 law.
HUD issued the preliminary rules for comment last summer. The agency's draft of final rules must pass review by the Office of Management and Budget. The final version could be issued this summer, officials say.
Several large mortgage lenders support Martinez's proposal for a guaranteed closing price. Anne Canfield of industry group Consumer Mortgage Coalition says the single-fee idea would quickly sweep the industry.
"Everybody's champing at the bit. This is the biggest thing going in the industry," Canfield says.
Many fingers sharing the pie
Whether final rules bear much resemblance to the original proposal remains in doubt.
Brokers, title companies, settlement attorneys, appraisers and others who draw fees from the current way of doing business say all the proposed savings from Martinez's proposal will come from their fees.
During a recent HUD comment period, opponents unleashed 40,000 complaints. And they have enlisted members of Congress.
Stanley Friedlander, president of the American Land Title Association, sounded a typical complaint at a hearing in February: "By squeezing the small (title insurance) agent, it would virtually put them out of business."
Opponents also point to ABN Amro as proof that the rule change is unnecessary. But ABN Amro's Graham, who favors industry reform, rejects that.
His company is saddled with the same costly, inefficient disclosure requirements that inhibit broader industry adoption of the single-fee approach, he says.
A promise of strong rules
Martinez says the savings from the proposed rules will come from everyone in the industry, not just the small fry. By their nature, says Martinez, real estate transactions will always be local, assuring a place for small local businesses that provide closing services.
Martinez's initiative is the latest in a series of attempts at pro-consumer reforms in the mortgage business. Inevitably, they've stalled amid intractable differences among the various players.
Rheingold, the consumer advocate, predicts HUD's pro-consumer proposals as issued last summer will be watered down when finalized. He says Martinez stumbled into stronger opposition than he bargained for.
"HUD didn't recognize all the people who get fees out of this process," he says.
Nevertheless, Martinez promises strong rules. "Failed efforts of the past were rooted in people's attempts to reach consensus," he says. "Consensus isn't possible in this case."
Charles Hora, a commercial property manager in Delray Beach, Fla., is among those hoping for an industry transformation. Hora, 58, says he can't recall an instance in his half-dozen residential mortgage transactions when a deal didn't shift substantially between application and settlement.
Says Hora: "If any other businessman acted this way, they'd call him a crook."
