THE HOTTEST trend of 2003 in new home mortgages and refinancings?
Would you believe it's something that consumers have sought for years: Fixed-price, guaranteed packages of closing costs, where you know the bottom-line expenses at application and there are no 11th-hour surprises.
Lenders and brokers nationwide are introducing competing prepackaged or "bundled" settlement deals to pull in rate shoppers.
In most cases, the fees vary with the size of the mortgage and location of the property. But this month one lender took the trend to the next level: Greenlight Financial Services of California began offering a one-size-fits-all $995 "flat fee refi" covering the closing costs on any "conforming" mortgage up to $322,700. "Conforming" means the loan fits all the underwriting requirements of Fannie Mae and Freddie Mac.
A growing list of other mortgage companies - some of them among the highest-volume in the country - now offer peace-of-mind settlement packages. GMAC Mortgage and its Ditech affiliate are closing a combined 12,000-plus prepackaged mortgage settlement transactions every month, according to Chief Operating Officer Ralph Hall.
ABN AMRO Mortgage, fifth-largest loan originator in the nation, has closed more than 75,000 "one fee" guaranteed-price packages, primarily through its online Mortgage.com subsidiary. E-Loan Inc. also offers prepackaged, fixed-price settlement deals as an option. Chris Larsen, chairman and CEO of E-Loan, says: "We don't make a big deal about it, but we do think this is what consumers are demanding."
Some mortgage brokers are jumping into the guaranteed market as well. Fairway Independent Mortgage, which is based in Madison, Wis., and has 53 offices around the country, has begun switching to fixed-price packages as a service to applicants.
"People don't want to gamble with 'good faith estimates' anymore," says President Steve Jacobson. "They just want to know the bottom line."
The move to packaging follows two years of increasing controversy over alleged settlement fee abuses. Thousands of homebuyers and refinancers have complained to federal and state authorities about "low-balling" on settlement cost estimates by lenders and brokers.
For example, a lender may quote a loan shopper an interest rate of 6 percent and provide a "good faith estimate" of $1,800 in closing expenses. But at settlement, the borrower is horrified to find that the closing documents require an additional $1,200 in fees the lender never mentioned up front.
To bring greater certainty to the mortgage settlement process, federal Housing Secretary Mel Martinez proposed a series of reforms last year that would penalize lenders and brokers for low-balling settlement fees. He also proposed an optional, guaranteed mortgage packaging approach that would require lenders to quote - and deliver - a fixed-fee package up front. Shoppers could then compare the rate-plus-settlement-cost packages of competing lenders and make informed decisions.
Martinez's proposal is expected to be issued in final form late this spring.
What do the prepackaged deals already on the market cover? The new Greenlight Financial $995 refinancing package covers "all loan-closing charges including title, escrow, appraisal and notary," says Joann Pham, president and chief executive.
ABN AMRO's "one fee" guarantees a single bottom-line charge for virtually the entire list of typical settlement services: lender discount points, appraisal, credit reports, lender title insurance, attorney fees, property survey, flood zone certification, underwriting fees, processing fees and recordation costs. The only items not covered in the upfront quote are local property and transfer taxes, mortgage insurance premiums, prepaid interest and hazard insurance premiums.
GMAC/Ditech and E-Loan cover roughly the same services.
Behind the rapid shift to prepackaged services is a series of changes under way in the mortgage industry.
In recent years, an industry of multiservice packagers has come into existence, providing credit, appraisal and flood zone certifications, notary and other closing items to lenders anywhere in the country. As a result, a lender looking to offer a guaranteed-fee package can sign up for multiple services from a single, national provider, rather than have to assemble vendors one by one for each market.
In some cases, technological advances in risk evaluation are allowing settlement service providers to offer discounts on certain products.
In the title insurance field, for example, some companies are offering deep price cuts for streamlined policies. Fidelity National Title Insurance Co. recently began offering a flat-fee $275 title package for mortgage refinancings, far below the traditional level. Property valuations in refinancings and home equity loans now frequently involve electronic database assessments that cost just a fraction of the $350 to $400 for traditional appraisals.
With all this price-cutting under way, what's the outlook for consumers? You can be certain of this: Packaging is here to stay, and something that smart shoppers should ask about in addition to interest rates. But when you do, make sure you also get a detailed list of the services included - and excluded - so you truly can compare competing mortgage deals.
Ken Harney's e-mail address is firstname.lastname@example.org.