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HUD IS INCAPABLE OF PROTECTING THE CONSUMER WITH RESPA REFORM

* * * * HARD CORE REAL ESTATE TALK * * * *

HUD PROPOSES CHANGES TO RESPA that they claim would save consumers over $8 Billion a year by requiring disclosures that would help consumers shop for title insurance and settlement services.

WHICH COMES FIRST, FINDING A HOME TO BUY OR SELECTING THE MORTGAGE COMPANY? This is the same HUD that recommends a consumer begin their home shopping adventure by selecting a mortgage company first and a real estate agent next. I suppose they will soon be recommending that a home buyer select:

First: a mortgage company
Second: a title company
Third: a real estate agent

Many of the consumers who have defaulted on their mortgages and now contributed to the statistics generated by the mortgage mess did, indeed, begin their home buying process by responding to mortgage company print, TV, Internet or radio advertising. How's that working out?

THE HUD SOLUTION: ONE FORM IS BETTER THAN TWO.   Most of the settlement services abuses of the consumer that I've witnessed over the past 25 years have been the result of affiliated business relationships. Substituting two disclosure forms that the consumer doesn't understand with a single form that the consumer doesn't understand won't stop the abuse.

Trying to stop kickbacks within affiliated businesses is impossible. The very existence of affiliated service providers owned in part or in whole by one company is simply one magnificent kickback scheme. It's the scheme that is the abuse, not the individual referrals. So far, any regulation proposed or enacted has sought to prevent $30 kickbacks to single agents while the affiliated companies might enjoy an additional $30,000 or $300,000 or $3,000,000 in profits.

Marketing settlement services directly to the consumer will, IMO, lead to the same abuse and profiteering in settlement services that resulted from lenders marketing mortgages directly to the consumer.

"WHAT IS YOUR INTEREST RATE??" HUD was and still is one of the entities that recommends that consumers begin their search for real estate services with the mortgage company rather than the real estate agent. That has led to a proliferation of consumers tied to mortgage companies based on one feature, the mortgage ratewith no comprehension of the actual cost of that mortgage rate. HUD assumes that the consumer understands a mortgage loan sufficiently to shop intelligently. The average consumer understands only one component of a mortgage, the interest rate. The consumer does not understand how origination fees, discount fees, lock in fees, etc. affect the quoted interest rate.

"WHAT IS YOUR SETTLEMENT FEE??" Similarly, if title services companies begin to market directly to the consumer, those same title companies will begin to advertise the "lowest cost real estate closing" just as the mortgage companies advertise "lowest interest rate for your mortgage", neither of which is likely to be true.

The problem is, the consumer doesn't know what they are buying and have neither the knowledge nor experience to make intelligent choices. There is no relief for the consumer coming out of any RESPA reforms published to date.  There is merely a shuffling of the deck of cards that are already stacked against the consumer.

IF IT'S FREE, IT MUST BE GOOD! The affiliated companies will always be able to advertise a lower Settlement Services "settlement costs". the Devil is in the details. How about this: FREE settlements!! The consumer is always attracted to FREE. Does the average consumer have sufficient knowledge to shop title examination services?? I have not yet met a consumer that understood the nexus between the Settlement Fee and the Title Examination Fee. Is there a benefit to the consumer to receive a FREE settlement meeting and then pay $500 for a title examination?

Does the average consumer have sufficient knowledge to shop title insurance rates? Hardly. Most consumers don't even realize that the title company is receiving a commission on the sale of title insurance. Profits from settlement services are not from conducting the closing meeting or managing the settlement transaction, most of those fees, survey, abstract, etc. are simply passed through. The profit for the title company is from the commission paid on the title insurance premium. While it's necessary and fair for title companies to be profitable, the public would be better served if the disclosure were honest and not diversionary. Why focus on a $30 kick back to an agent who recommends an affiliated title company when that same title company is generating an undisclosed $3,000 commission on the title insurance premium? Filing the title insurance rate with state regulators is not disclosure to the consumer. Want to see a consumer's eyes glaze over? Hand them a HUD-1.

THE DEVIL MADE ME DO IT. If you are a real estate agent reading this article, the next time you accompany a buyer to settlement and the settlement officer or settlement attorney fails to disclose that they are receiving a commission from the title insurance premium, mention it and watch the expression on the settlement attorney's face.

Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988.

Posted by Lenn Harley, Real Estate Broker, Maryland & Virginia on 08/12/2008 07:21 AM

Comments (27)

mortgage mess, settlement mess

Post is included in group: ABC's of Real Estate Marketing
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27 Comments on HUD IS INCAPABLE OF PROTECTING THE CONSUMER WITH RESPA REFORM

AUG

2008

If lenders can boost their profits by adding on a variety of fees, then title companies are doing the same thing. Some may be legitimate, some may be inflated and others may be pure fiction but. .it is the Realtor's job to protect their clients from these overcharges. ..When the Realtor with the Brokerage they represent has a Joint Venture (JV) with a lender or a title company . . then they are operating for the Brokerages best interests. . NOT THEIR CLIENTS . . that is just my opinion.

Lenn--This seems almost unreal...When REALTORS have been licensed for nearly a century and just a handful of states have just started regulating the mortgage industry, where do they think the problem started?

Fernando. BINGO!!

Teri. The regulators, HUD, et al., would have the consumer decide all of this by themselves. Without an experienced fiduciary to help the consumer, they are just like Lambs going to the slaughter.

Or, to use a Rumsfeldism, "They don't know what they don't know".

It has been my experience when I worked for a real estate in the Northwest suburbs of Chicago that the consumer never knows they are able to shop and choose a title company. In the seven years I worked for the attorney, not one consumer asked to work with a particular title company.

The attorney's use their "commission" from the title company to make up for charging fees that are too low to begin with.

Great post here Lenn. IMHO, if professionals charged what their services were worth and stopped tainting consumers with "low fees" than the kickbacks might taper off (o.k- a little idealistic) or at least because less prominent and less important.

Good quality service is worth something and we need to stop devaluating it as service providers.

Rebecca. Thanks. As a buyer's agent, I recommend title companies with whom I have experience and know that they will get the job done and treat my buyers with respect, charge fair fees and conduct a helpful settlement.

How is a first time home buyers supposed to know a good title company?

Lenn,

You make so many valid points here I don't know where to begin to comment, so let me just try to add some other food for thought:

1) I can live with starting your hunt with a real estate agent...a professional one, not merely a licensed one

2) Starting with a lender is bass ackwards...if you find a Fannie Mae lender you're happy with, then find a property that is non-conforming according to Fannie Mae regs, then what...e.g. you find a nice home, but is has a rather large lot (more acreage than Fannie likes)...just one example...

3) You're absolutely correct that affiliations are the scoundrels...consumers should still be permitted the right to choose their own providers of settlement services, albeit with the ethical assistance of a competent and ethical r.e. agent...

4) I'd rather see a permitted small referral fee to an agent, say $30.00, than see the abuses that occur under the present system...

5) Just one caution...when discussing title rates, premiums, services...there is such a wide variation state to state and sometimes even region to region within a state, that you must resist the urge to 'paint with a broad brush' if your attempting to evaluate and compare systems!!!

Overall this is a great post to provoke discussion and debate using diligence and care!!!

Thanks, Fran

P.S. I am a profound believer in RESPA...I just would like to see it written fairly and ethically...and oh, yes...see it enforced!!!

How true...this is a cesspool in a blender. If HUD really wanted to protect the consumer they just need to prosecute true fraud. There's so many rules that some are violated without legal intent...just lack of knowledge. Those who violate with intent need to be hung. Those who are ignorant, need to be further educated. More rules means more violations anyway.

Fran. I would never compare settlement costs across localities. They are different from state to state and county to county in my market.

Thanks for your comments. Right on target.

Larry. Right on. More rules are just more rules to violate.

Lenn, in my experience, when a buyer has selected a real estate agent, and that agent has selected their team: the Mortgage agent that best fits the client, the title company, etc, the transaction actually works the best (I am going to exclude short sales and REOs). AJ

AJ. Of course, of course. Why cannot HUD see that simple fact?

If you leave the choice of a title company to an unsophisticated buyer, they'll go with their old college roommate who works for a downtown law firm that does three settlements a year - and charges a fortune. I think that being able to recommend local companies (like three) that provide great service is part of the service that a good agent offers. My old company had affiliated business partners up the wazoo, and I never included them because they weren't compeititve in terms of either price or quality of service. I knew that from several hundred transactions. The buyer doesn't have that experience.

Lenn,

As you know I often write that "The only protection the consumer has is the personal integrity of his Loan Originator!" Not having had you in one of my classes what you don't know is that I've been preaching the same thing about their REALTORS since ‘74 or ‘75. A fiduciary* relationship with a knowledgeable REALTOR and Loan Originator is a must.

Where the consumer should start has always had just one answer with me! It doesn't matter which hat I'm wearing, so long as I'm only wearing one! Since I'm not available, and every ad claims to be the most experience or have the lowest rates, the consumer needs a trusted referral from someone who has successfully worked with the professional. You noticed I didn't say LO or REALTOR, it doesn't matter which if their competent and trust worthy! Once they have selected a professional that pro' can help them select the other.

My experience with title companies is that as regulated insurance their prices don't vary enough to worry about! It's all about service and while it's the consumers choice they have no way of knowing.

Escrow is a different matter. Escrow cost can and do vary. How ever Escrow is a different matter the integrity of the agent is paramount! A biases escrow agent can drastically alter a closing, and get away with it, if the escrow instruction don't follow the original O & A.

Escrow and title services have to be agreed upon by the buyer and seller and acceptable to the lender so consumer shopping is generally a mute point. Any recommendation by HUD to the contrary is up to their high standard of incompetence.

You say: "The consumer does not understand how origination fees, discount fees, lock in fees, etc. affect the quoted interest rate." That covers it! APR was suppose to make it easer, it might have but HUD wrote the rules! With every revision it got worse! With ARM's it's (reg. Z) probably the most biggest cause of confusion.

Then there is the distortion of APR being determined over the full length of the loan, not the likely life of the loan.

No amount of disclousers can over come the evil that is affiliate companies! However, affiliate companies should be discorgaged not out lawed For like politicol canadates bad can be a lot better then worse.

The best thing Congress coul;d do would be to get rid of HUD and then insiste that current laws be enforced!

Bill

*We've had the fiduciary debate, no matter where a person stands the consumer is entitled to nothing less!

I don't use my companies partner title company, although they are right in my office and very convenient. I use a title company that gives good service, period. Second of all in MI the consumer is REQUIRED to sign a form that says it is an affliliate with KW.

At the listing appointments I ask them if they have a title company they would like to use. Of course many of them don't have a clue, if not I suggest the one I work with and they are fine with that.

Lenn:

Please explain to me why a mortgage broker/loan officer is incapable of explaining settlement costs to a real estate buyer? If buyer comes to the mortgage broker first, an estimated good faith is handed over and discussed at length with a buyer, along with the interest rate. Yes, maybe their eyes glaze over. Yes, maybe this is the most boring part of the transaction. Yes, maybe they do not understand it. Exactly what do you propose we do about this? I don't understand.

Bringing settlement charges into the spotlight may bring just the awareness consumers need.

You would somehow have us believe that the consumer has no chance of having a good mortgage experience unless the real estate agent refers client to one of her "trusted mortgage partners". I do not agree with this philosophy of yours and never have.

Lenn: I am as against on line mortgage companies as much as the next guy. But to insinuate that this is the cause of the mortgage mess is pretty far out there.

I have never had a client come to me who chose their real estate agent first who had experienced any discussion of how much closing costs would be. I have had plenty of clients come to me after going to a real estate agent first who were looking at a house far too expensive for what they could afford, and who had an extremely unrealistic idea of closing costs.

There is nothing wrong with understanding what you can afford and how much cash you need to get there BEFORE you go to a real estate agent.

Some buyers deliberately DO NOT choose the mortgage broker that was recommended by the real estate agent because they fear that there is some sort of kickback going on, or that it will be a "two against one" scenario. (Obviously that is not true..but as you said...what do buyer's know?)

How ironic is that in relation to this whole post?

I have watched the "affiliated business disclosure" statements get thin over the years but had one come over my fax machine just last week. I can't believe it is still going on. Want an inspector? Here's three choices, do you homework. Want a home warranty company? Here's three choices, do your homework.

Heck no I won't get involved in that!

Bill. I'm not in an escrow state. In reality, the agent with fiduciary to the client is a powerful consumer tool if the agent has experience and the buyer has a level of trust to listen. In my area, agents and brokers control the transaction from search to settlement. That's a good thing, IF the agent knows what they're doing. Experience is what counts.

Janet. You wrote: "I have never had a client come to me who chose their real estate agent first who had experienced any discussion of how much closing costs would be."

It would appear that buyers who come to you for mortgage services are not being represented by an experienced real estate agent. In my business as a buyer's agent, we, the buyer and the agent have a serious discussion about price range, money to close and how we get to settlement, including a pro-forma HUD-1. I need to know the buyer's needs before I can recommend a mortgage company.

I have a number of mortgage companies to whom I can recommend the buyer depending on their needs: needs help with closing, needs competitive super jumbo loans, needs low fees for VA loans, needs jumbo or conforming with long settlement times, home improvement loan, etc., etc. If I haven't analyzed my buyer's needs, I couldn't make a good recommendation. Otherwise, they might just as well open the Yellow Pages and drop a pointer.

It's when a buyer comes to us who already has a relationship with a mortgage company that cause the most trouble. Getting a GFE is like pulling your hair out. Getting a HUD-1 before settlement is often impossible. But, since it's the buyer's choice, there is little we can do except educate the buyer to understand what they need to know. If the buyer prefers to pay high fees as the cost of making their own mortgage choices, I don't argue with them. Sometimes the buyer's comfort with their chosen lender is more important than the few $hundred or even $thousand dollars their choice will cost them.

You wrote: If buyer comes to the mortgage broker first, an estimated good faith is handed over and discussed at length with a buyer, along with the interest rate.

I have received many GFEs from mortgage companies that the buyer selected that approved them for $XXXX loan amount with the condition that the seller contribute 6% closing. At that point, the two things have happened. One, the lender has limited the home search to a home owned by a seller who is willing and able to contribute 6%. Secondly, the buyer at that point, believes that the 6% seller contribution is some sort of buyer's right.

The matter of qualifying a buyer for a price range is always the first step for a responsible buyer's agent. Price, terms and conditions are all part of qualifying a buyer. I still believe that a real estate agent is capable of performing these duties as a part of the overall representation of a home buyer.

Once we find a home in the buyers price range and meets the terms and conditions for the buyer, we can then shop the loan. We will, of course, need a credit review letter to accompany the offer.

That is what works for me. Can I deal with buyers who come already working with a mortgage company. Of course, but it doesn't always redound to the buyer's benefit.

Missy. Buyers select the title company in my market area. That means the agent delivers the contract to the title company in the area of the house who has demonstrated good service and fair fees. Closings in my area go very smoothly.

One of my agents had a closing with the brother-in-law of her buyer. It was a disaster. He was a patent attorney.

He over paid our commission by $1,500 and when I called about it, he yelled that he was the title attoney and don't tell him how to do his job. "After all, you're just an agent."

"O.K. Fine," says I.

I just let the money set in my escrow accounty for 5 months until his accounted started looking for the money. Sometimes you just have to chuckle.

Interesting how different this is from the way it works here in my market.

Experienced real estate agents in my market do not try to qualify buyers to the best of my knowledge. They refer to a mortgage broker(s) before they begin the home search.

I agree you need to know the buyer's needs first. In fact, at times you really need a full scale approval (for marginal buyers). But certainly, you need to know the price range or risk wasting agents time, and breaking some poor client's heart over a house he cannot afford.

I have no idea why it would be a problem getting a GFE. It is required that loan officer give one to each buyer. I would have NO PROBLEM handing mine over to you, and NO PROBLEM if you chose to challenge me.

In our market the selling agent is the one who choses the title/escrow company, NOT the mortgage broker. The only charges from me are credit report, processing fee, and origination. All the rest of the fees are being charged by the company the BUYERS AGENT picked out.

I do see your dilimma with closing cost credits. Do you believe that mortgage brokers should never mention this as a possibility? Is this something that should only be brought up by real estate agent? Your opinion, as always, has my respect.

I can deal with clients who are already working with a real estate agent. Of course, that sometimes is also not to the buyer's benefit. Or to the Realtors.

Of course a Realtor is capable of of performing the duties of qualifying a client to the point of showing houses.

Buy why? So that you can control the transaction by choosing your own mortgage company?

Janet. I understand the mortgage broker wanting the opportunity to qualify a buyer. That is simply a service I don't need or want. If the buyer is qualified by a mortgage broker, that bond is way to soon for my liking. When I get the buyer's financial statement, I have a good handle on their qualifying range, money to close and needs in terms of closing help or loan type.

If the buyer has already bonded with a mortgage broker, what happens if they need certain types of loans that that broker doesn't offer. I've had many mortgage brokers tell buyers that the VA loan or FHA loan was not good. My question to that mortgage broker is "Are you qualified to offer VA or FHA?" The answer is always NO but we have a conventional loan that is better. Now that might work with buyers and some agents, but not with me.

Buyers (with advice of their agent) select everything here, mortgage company, title company, etc. The seller just gets to sell their home and in MD gets to pay half of the transfer and recordation and pay the agent fees.

Why do I want to qualify my buyers? No. Not to control the transaction by choosing my own mortgage company. I have no mortgage company. I have no affiliation with any mortgage company. I refer to a number of mortgage companies based on the buyer's needs and their history of getting the job done timely and for a fair fee.

Mortgage companies or brokers don't even get to pay for lunch.

Lenn,

As to your question, in Illinois, Seller's chose the title but in most cases attorney's affiliate with big title companies and then get their "dues" to make up for charging lower attorneys fees. In my mind, to rake sellers and/or buyers over the money coals on the backend stinks. Charge the right fees for the legal services upfront and then price the title rates agressively.

There must be a lot of mula kicked around title, at least there used to be. Title companies used to be the biggest sponsors at most real estate and relocation conferences.

Lenn:I understand that you do not own a mortgage company. You said:

I refer to a number of mortgage companies based on the buyer's needs and their history of getting the job done timely and for a fair fee.

But the reason why you do this is because you believe this is better for the client and better for you. My question has always been, is it really better for the client, or is it just better for the agent?

Better than the alternative, which you describe as bonding too soon. A buyer in California would simply not hand over a financial statement to their real estate agent. If I had that financial statement, I would not hand it over to the agent either.

I think things get very muddy when both the mortgage broker and the real estate agent try to qualify a buyer. It would be like me (the mortgage broker) saying to your buyer "Let's jump in the car and let me show you some great neighborhoods (just in case your Realtor doesn't KNOW about these areas).

Huh?

AUG

2008

Lenn, the abuses in Southern California were a lot bigger than $30 referral fees. First American settled for $10 million after RESPA discovered their reps were treating agents to trips and concerts and even purchasing monitors. I'd like to think most agents are above taking kickbacks that are essentially paid for by clients who are already paying the agent a commission, but when abuse is commonplace, even good people will be corrupted. RESPA isn't perfect, but I shudder to think of the level of abuse that would go on without RESPA. It's like any form of regulation, it won't stop the bad guys, but it will slow them down and make it easier for the good guys to compete.

"For a minute there, I lost my head..." - Radiohead, "Karma Police"

Rebecca. It appears that Illinois is an Attorney Settlement state. We are not. We also have title companies. Most settlements in VA are by attorneys and they cost about 2 times the cost of Md.

Janet. I don't know whether or not mortgage brokers in CA have fiduciary to a buyer, but real estate agents and brokers representing a buyer in MD and VA surely do.

Your question "is it really better for the client, or is it just better for the agent?" ignores the fact that I have a duty of fiduciary to my buyer clients. I don't have a financial interest in my buyer's loan. There is absolutely no incentive for me to recommend one mortgage company over another except that I trust them to get the job done based on the contract and at a fair cost to my buyer client. Since I don't accept buyer referrals from any lender, there is simply no basis for your question which isn't really a question but an accusation.

In my market place, the agent or broker has a duty of fiduciary to a buyer if we are serving that buyer as their Buyer's Agent. We agents manage the transaction from home search to settlement. The first step in that representation is determining a price range. That doesn't take a loan officer. If I suspect that a buyer may have a credit problem, I can have a credit review by one of many loan officers. Once my buyer finds a home that they would like to buy, they are referred to local loan officers based on the type of loan, location, price range, etc.

Before referring the buyer to a lender with whom I have experienced numerous successful settlements, I always review a financial statement prepared and signed by the buyer. In fact, that financial statement is submitted with the offer. If we expect a seller to take their house off market, we need for that listing agent to assure the seller that my buyer is qualified. There is no way I'll write a contract of sale without reviewing a financial statement. Nor would I look at an offer for a seller that didn't include a financial statement. My contracts close and they close on time. There are no last minute financing surprises and my buyers know what to expect at closing.

The duty of fiduciary causes agents and brokers to strange and wonderful things such as putting your client's interest above your own.

Lenn,

Just stopped back to read over the comment thread...nice coverage of some interesting points! Thanks, Fran

P.S. I've seen 'life before RESPA'...it wasn't very purty!!!

AUG

2008

Fran. Thanks. Indeed, without RESPA, things would be a lot worse. My fear is that HUD is now so politicized, the final regs following RESPA reform will reflect the influence of Congress based on the leveraging by the various special interest groups.

I have completely lost faith in any government entity reflecting the interest of the consumer.

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