Federal law prohibits any bundling because the discounts could tilt the advantage to certain service.
By JEFF LAZERSON | email@example.com | MortgageGrader.com | January 16, 2023
Article originally posted in Orange County Register on January 12, 2023.
A restaurant offers you a meal deal discount for a burger, fries and soda. Perfectly legal.
A travel agent offers you a bundled discount for your cruise, airline seats, hotel room and limousine transportation services. Also perfectly legal.
A real estate agent, mortgage lender and home title insurer offer a bundled discount to a homebuyer. Patently illegal. In fact, they run the risk of going to prison under Section 8 of the 1974 Real Estate Settlement Procedures Act, or RESPA.
Lack of housing affordability is a crisis of epidemic proportions for lower-income homebuyers in underserved communities along with everyone else wanting to get on the road to homeownership. Down payment and closing costs are the biggest barriers to homeownership. It’s an untenable king’s ransom for too many.
Yet, an antiquated rule of law stands in the way of significant affordability improvements.
The big idea behind the RESPA law is nothing of value can be provided to a real estate settlement provider in exchange for business. Examples of real estate settlement providers include real estate agents, mortgage loan originators, title companies, escrow companies, home inspectors, appraisers, homeowners’ insurance, mortgage insurance companies and notaries.
Hidden in plain sight to substantially reduce the financial barrier to homeownership are these bundled settlement services discounts.
Think Costco. How easy would it be to create a technologically-driven consumer shopping platform to order all the required real estate settlement services with, say, a 30% discount over standard retail pricing? This exists everywhere else in our consumer lives. But not real estate.
Here’s an example: Take a $600,000 home sales price with 5% down, leaving a loan amount of $570,000. The real estate agent earns roughly 2.5% of the $600,000 or $15,000. The mortgage loan originator may earn 1.75% of the $570,000 loan amount or $9,975.
Lender underwriting, loan documents and loan processing type fees are $1,500. The appraisal is $650. Escrow, title insurance, homeowners’ insurance and notary fees are $4,806. That’s a combined $31,931. If everyone in the bundle agreed to a 30% haircut for the benefit of the homebuyer, the total purchase cost (including the 5% down) drops to $52,352 from $61,931, a 15.5% or $9,579 savings.
The $209 monthly mortgage insurance premium (required when putting less than 20% down) would be reduced by $62.70 to land at $146.30.
Making this happen might be easier — and harder — than you think.
“There is a legitimate business justification in lowering the cost to consumers,” said Roger Fendelman, a real estate compliance expert attorney. “It’s a complicated issue, a huge can of worms.”
That can of worms, Fendelman said, would include unearned fees for settlement providers, steering buyers, charging others much more to make up for the discounts and fair lending issues.
The Consumer Financial Protection Bureau may be able to make this additional shopping choice happen by a rulemaking change to Regulation X, which protects consumers when they apply for and have mortgage loans, according to Fendelman. If the CFPB wasn’t inclined to update RESPA, Congress could.
The harder part would most certainly be industry opposition in one form or another. Title insurance companies, settlement agents, Realtors, and mortgage lenders and mortgage insurance companies, to mention just a few, would be screaming bloody murder to protect their high-profit turfs.
And, you’d have legitimate questions about the speed and quality of service, plus pricing compared with shopping a la carte. Consumers have certainly been able to figure out these issues in other industries thanks to online reviews and media scrutiny.
Some small business owners I spoke with about bundled services also expressed concerns they’d be crushed by the big dogs.
The real estate settlement industry is used to paying for leads — but in different forms.
Real estate brokers referring homebuyers and home sellers received an exemption from the anti-kickback law. Agents routinely provide 25% referral fees (assuming a $600,000 sales price at 2.5% commission that’s $3,750) to agents across town and across the country in exchange for the referral and closing of business.
Plenty of lenders pay for mortgage leads through legal lead generators such as Lending Tree and Zillow, for example.
And then, of course, there are the illegal kickbacks. Settlement services’ kickbacks are common, routine and expected in one form or another across the U.S. There is little or no fear of getting busted because there is little or no RESPA enforcement. When is the last time you read about real estate settlement providers getting busted for a RESPA violation?
The result is consumers get a raw deal by unknowingly paying more due to the lack of prevention and enforcement of illegal referral fees. Honest, hardworking settlement services providers following the rule of law suffer huge business losses.
President Biden, Consumer Financial Protection Bureau Director Rohit Chopra and members of Congress, are you really interested in helping first-time buyers?
Freddie Mac rate news: The 30-year fixed rate averaged 6.33%, 15 basis points lower than last week. The 15-year fixed rate averaged 5.52%, 21 basis points lower than last week.
The Mortgage Bankers Association reported a 1.2% mortgage application increase from last week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $1,268 less than this week’s payment of $4,509.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.125%, a 15-year conventional at 4.75%, a 30-year conventional at 5.625%, a 15-year conventional high balance at 5.25% ($726,201 to $1,089,300), a 30-year high balance conventional at 5.82% and a jumbo 30-year fixed at 6.5%.
Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.
Eye catcher loan program of the week: A 30-year VA fixed rate at 4.875% with 2 points cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org. His website is www.mortgagegrader.com.
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Jeff Lazerson - Mortgage Columnist since 2011