Maryland and Virginia Real Estate and Homes Blog

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 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.