Here’s a typical story: An excited couple looking to purchase a new home seems eager to work with a real estate salesperson, sign the paperwork and begin the closing process. But what stops the deal is the confusing unpredictable mortgage closing process, the add-ons, fluctuating fees and general bafflement that consumers sometimes feel is synonymous with the home-buying process.
“We’ve found in every survey we’ve done that customers dislike uncertainty and surprises, and many have the fear that they’ll be taken advantage of during the mortgage closing process,” said Garth Graham, SVP of e-commerce at ABN AMRO.
Supporters of bundling say it’s akin to buying a car. Do you purchase an automobile for one price or do you buy a car with unknown extras like tax, title and that mysterious undercoating fee?
Opponents of bundling say the process has pitfalls. One major concern is that large lenders will gain inequitable control of the mortgage market. The argument is that ultra-large lenders with high volumes of bundled sales could offer such heavily reduced price structures that smaller shops wouldn’t be able to compete.
The debate has wound its way to Washington, D.C., where Realtors and lenders are at odds over the Department of Housing and Urban Development’s proposal to “reform” the Real Estate Settlement Procedures Act known as RESPA. The package HUD most recently proposed suggested one lender-led, federally regulated, fixed-fee package of interest rates and settlement charges for each home-buying transaction. HUD said the approach would streamline the home-buying finance system.
Some opponents of HUD’s proposal have said a two-package approach would be more beneficial because it would allow buyers to comparison shop for settlement packages among both lenders and non-lenders while HUD’s single-package proposal would reduce competition and limit borrowers’ choices.
“Less competition means a contraction of the real estate industry and higher costs for consumers,” Walt McDonald, president of the National Association of Realtors, told the U.S. House of Representatives Committee on Small Business.
Some critics have said the single-package approach would put lenders in a position to negotiate and control other suppliers’ fees. Larger companies would be able to exercise more control over bundled pricing structures, creating a sort of mini monopoly of available bundled mortgage offerings.
Providers of bundled mortgage services argue the benefit to the mortgage borrower outweighs any perceived risks. E-Trade Financial began offering bundled mortgage services for a single price in 1999. On refinancing deals, the company offers a lockable rate that covers all closing costs, including title, insurance policy fees, settlement charges and such fees as appraisal and subordination fees on a second loan.
“Consumers were fed up with the complexities of the mortgage process,” said Robert Bernabe, head of retail marketing and lending for E-Trade Financial. “Unbundled packages create more profits for businesses. When bundled fees are quoted, it brings all the prices down a notch.”
One industry report found that consumers often would select a lesser-known lender that offered a fixed-price fee rather than a brand name bank.
“More often, consumers will pick price certainty over brand-name recognition,” Bernabe said. “They’re wary of what might be hidden.”
GMAC Mortgage also decided to offer bundled mortgage services through its Ditech subsidiary after it conducted consumer market research.
“There’s a degree of uncertainty in purchasing a home and an even bigger concern about closing costs,” said Rick Gillespie, EVP of GMAC Mortgage. “Anything that can be done to help the customer understand the costs of financing a home is going to be a win/win situation for the whole industry.”
Ditech offers a $395 one-fee package that includes all closing costs except of a few items like prepaid interest.
ABN AMRO took the bundling route in January 2001, and the move is paying off. The company has completed more than 165,000 single-fee loans to consumers for more than $25 billion in volume since it began offering a single bundled closing fee called OneFee. Nine months ago, the company rolled out OneFee to mortgage brokers to enable them to provide OneFee loans to borrowers.
Ocwen Financial also offers a fixed-price bundle for mortgage originators, mortgage brokers and real estate brokers through Ocwen’s REALTrans software.
“The bundled services provide consumers with certainty about the costs of closing a real estate transaction,” said Ocwen’s Susannah Harter. “The bundled services also create economies of scale, reflected in lower pricing for consumers and higher service levels for originators and brokers.”
Graham says the “speculation and concerns (over bundling) are all nonsense.”
“If your current business model is confusing to the customer, your business is in trouble,” he said. “Every trade show I visit, someone is speculating about which companies and businesses will lose (now that bundled services are on the market). The remarkable thing is, none of those people ever talk about the customer and where they fit in.”
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