• Mortgages: Reform derailed
Mortgages: Reform derailed
The greedier elements of the mortgage industry—including a few who prefer confused, gullible clients—have derailed a good reform proposal in Washington.
The Department of Housing and Urban Development last month dropped a plan that would have simplified mortgage shopping and saved consumers about $700 on the average loan. It was one of the most pro-consumer proposals to emerge from the Bush administration.
The plan’s enemies are quite good at greasing campaign coffers and gaining the ears of politicians. So when the mortgage business hollered, powerful congressmen hopped to it.
Sen. Wayne Allard, R-Colo., is the chairman of the Senate Housing Subcommittee. He threatened to stall the appointment of Alphonso Jackson as HUD secretary if Mr. Jackson proceeded with the reform. “If you’re going to be head of HUD,” Mr. Allard lectured Mr. Jackson at a hearing, “you need to learn to listen to Congress and heed what it’s hearing from constituencies.”
Unfortunately Mr. Jackson, the former head of the St. Louis Housing Authority, caved. That’s too bad. The plan would have reformed the rules for “closing costs,” that grab bag of charges that consumers pay—often blindly—to close a loan. Consumers find the charges confusing, and lenders often pad them to boost profits. Right now, customers get only an estimate of the closing costs when they apply for a loan.
The administration plan would have let lenders bundle all the costs into a single package, then guarantee the price to mortgage shoppers. The interest rate would have been guaranteed as well. That would have encouraged lenders to compete by lowering closing costs.
Lenders would do that by squeezing appraisal companies, title companies and other suppliers to lower their prices on services included in closing costs. Naturally, those due to be squeezed didn’t care for the idea.
The bigger the lender, the more clout with suppliers. So small lenders and independent mortgage brokers fretted they’d be squeezed out.
The proposal had some flaws. Predatory lenders make their money by feasting off the ignorance of sheepish borrowers who can’t qualify for loans at favorable interest rates. Some consumer advocates said the one-price rule might make it too easy to hide exorbitant charges. They suggested that the rule exempt “sub-prime” loans—those that have higher interest rates or pre-payment penalties.
The rules also required more fee disclosures from mortgage brokers than from other lenders. A Federal Trade Commission study found that the one-side-only disclosure confused customers, and sometimes made them choose more expensive loans. Brokers had a legitimate complaint.
Brokers also complained that customers wouldn’t be given a detailed list of what their closing costs were actually buying. A good point, but all these problems could have been fixed with a little fine tuning.
Mr. Jackson has pledged to bring up reform again, but some are doubtful. “I think what you heard was Washington-speak for, ‘O.K., we’re done,’ ” Ira Rheingold, executive director of the National Association of Consumer Advocates, told The New York Times. “I think this has caused a lot of pain and suffering at HUD, and I don’t think they want to live through it again.”
We wish Mr. Jackson more courage for his next attempt at reform. If the government won’t look out for the best interests of Joe and Jane Homebuyer, who will?
St. Louis Post-Dispatch
