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Republicans blocking Mortgage-closing legistlation

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Home Improvement

If homeownership is the American Dream, then mortgage closing costs are the wake-up call. Housing and Urban Development Secretary Mel Martinez is pushing reforms that would make it simpler and less costly to purchase a new home or refinance an existing mortgage. But resistance is coming from, among others, select Republicans in Congress who benefit from the status quo.

Anyone who's been through the process is well aware of the expensive red tape associated with mortgage settlement. Purchasers paid $48 billion last year to "close the deal." HUD's proposed changes to the Real Estate Settlement Procedures Act (Respa) would save consumers more than $10 billion in annual fees for everything from loan preparation and title insurance to termite inspections. For the 11 million Americans who purchase homes every year, that works out to almost $1,000 per loan.

Under the current system, it's commonplace for borrowers to be presented with a laundry list of unexpectedly high fees at the settlement table. These costs can be thousands of dollars more than the "good faith estimates" they were given when they first applied for the loan. Along with down payments, HUD ranks these surprise expenses as the biggest barriers to homeownership.

Mr. Martinez wants to give banks and other lenders the option of offering guaranteed closing costs to consumers. The idea is to remove artificial barriers to competition and make these costs as susceptible to market forces as interest rates. Allowing homebuyers to receive, up front, one combined disclosure of all aspects of the loan will encourage comparison shopping and reduce the costs of originating and closing a mortgage.

Respa was enacted 30 years ago with the intention of preventing kickbacks to lenders from third-party settlement providers. Hence, volume discounts and other arrangements that might lower the costs of determining someone's creditworthiness are effectively prohibited. The unintended consequence has been a proliferation of transaction fees -- administration, title, appraisal review, loan coordination, money transfer, etc. -- not to mention mountains of paperwork that real-estate attorneys are all too happy to handle (for a fee). All of this can be overwhelming, particularly for seniors and low-income homebuyers.

By bundling these services into a single package, consumers will be more likely to understand, for example, the trade-off between accepting a loan with a higher interest rate and paying less at settlement. "These are all advantages over today's process of shopping for mortgages," according to a HUD study of the Respa reforms released last year. "Borrowers are better informed, shop better and reach better deals."

The only parties not interested in simplifying this process are those who make money keeping it unnecessarily complicated and cumbersome. Realty lawyers, title insurers, mortgage brokers and other intermediaries aren't thrilled about the prospect of seeing their margins squeezed. While the Bush Administration supports the reforms, some Republicans are siding with the middlemen.

Senator Richard Shelby of Alabama, who heads the Banking Committee, has made it known that he prefers the home loan industry as is. Less known is that Mr. Shelby is also chairman of the Tuscaloosa Title Insurance Co., which is shielded from competitive pricing pressure under the current Respa regulations. Representative Donald Manzullo, an Illinois Republican and former real-estate attorney, has even threatened to sponsor legislation that would nullify the HUD reforms.

But most legislators, as well as consumer groups, seem to realize that removing impediments to competition in lending is a greater good. Which is why Secretary Martinez's Respa proposals deserve to go forward.

Updated May 27, 2003

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