As published in Scotsman Guide's Residential Edition, May 2010.
In 2001, then-U.S. Department of Housing and Urban Development (HUD) Assistant Secretary for Housing and Federal Housing Commissioner Brian D. Montgomery said the core problem with the real estate closing process was that too many Americans were signing piles of paperwork they didn't understand and paying thousands of dollars for services they may never have heard of previously.
Nine years later, HUD has completed revisions to the Real Estate Settlement Procedures Act (RESPA) to bring the closing process exactly what Montgomery had in mind -- real transparency, more accountability and much more certainty. The new regulation also has led to technological advances, without which it would be virtually impossible for mortgage brokers to meet the demands of the new RESPA and remain profitable.
Implementation of new good-faith estimates (GFEs) and HUD-1s began earlier this year. Although HUD relaxed enforcement for the first four months of 2010, that ended May 1.
Mortgage brokers must now provide consumers with closing-cost estimates on which they can rely. As long as consumers use broker-selected or -identified providers, title insurance and certain other costs -- including government recording charges -- must not exceed estimated amounts by a total of more than 10 percent. In addition, brokers must now provide GFEs within three business days of receiving a loan application or information necessary to complete an application.
For many brokers and lenders, profits and competitive standing also are at stake. The new RESPA rules encourage borrowers to shop around and compare costs. Many consumers will find it easy to compare GFEs and choose the cheapest loan.
Brokers who come in too high risk losing business, while those who come in too low risk losing profits. Moreover, GFE suppliers -- be they brokers or lenders -- are responsible for making good on any costs that exceed the 10-percent limit.
For brokers who operate in a single small market, putting together GFEs with a few local vendors may not be difficult. But for regional and national brokers, creating competitive GFEs will require access to a wide range of accurate cost and price data. For example, recording fees and transfer taxes vary by state and jurisdiction.
Vendor-provided services also vary by market, determined in part by state laws and local ordinances or customs. Neglecting to list a required service or including one inappropriately can be detrimental.
If you work regionally or nationally, getting competitive costs from vendors in time to make the three-day GFE deadline can be virtually impossible without a database of live rates.
One alternative is to create blended rates based on a representative sampling of prices from various service-providers. Blended rates can help guide your GFEs, but they could leave you at a disadvantage compared to competitors with local vendors and better insights.
On the other hand, if your competition uses blended rates, you can seek local providers that charge less and increase your profitability with a greater administrative fee (i.e., origination fee). In this way, you can remain competitive and make a little more money on each deal.
If you decide blended rates are easier and better, however, you should compare those rates to local vendors' live rates case-by-case and to a national average from a multistate competitor. Assembling such a regional and national database represents a massive undertaking.
Fortunately, options exist. Databases of closing services with vendors' live rates -- originally created to serve consumers -- are being converted for brokers' use, as well. Some database-providers also can help brokers understand where specific information should go on GFEs and HUD-1s.
Without help from such technology, many brokers will find it nearly impossible to meet the demands of the new RESPA and the expectations of regulators such as Montgomery.
Steve Cook is executive vice president of Reecon Advisors, an independent economics-consulting firm, and managing editor of the Reecon Advisory Report, a subscription-based weekly newsletter covering economics and government policy.
Cook also provides communications-consulting services and was vice president of public affairs at the National Association of Realtors for seven years. Inman News named him one of the 100 most-influential people in real estate. Reach Cook at email@example.com.