How To Cut Closing Costs
It may well have been the most unusual stewardship seen by the Department of Housing and Urban Development in recent years. HUD Secretary Mel Martinez has both resigned and left behind an impressive record.
What’s remarkable about Martinez — now a U.S. senator from Florida — is that during his time in Washington HUD operated reasonably well. This is a substantial accomplishment given that the Department is huge and complex. HUD under Martinez largely did what it is supposed to do, did not devolve into a personal PR machine as it did under former Secretary Andrew Cuomo, and avoided scandal. The biggest goof — the failure of the Office of Federal Housing Enterprise Oversight to catch some $5 billion in unreported Freddie Mac profits — was plainly missed by a lot of folks.
But what people are most-likely to remember about Martinez is that he set in motion an idea which will — if established as public policy — help millions of people each year. Simply put, Martinez advanced the revolutionary notion that real estate closing costs can be reduced.
Martinez effectively said that closing costs should be seen as a lender responsibility. Given that lenders make lots of loans, they should be able to buy closing services in bulk, get discounts and then pass the savings onto consumers in the form of a closing “package” with a single price.
Some in the real estate industry have responded with the suggestion that a bundle of closing services should be available both from lenders and other parties — the “dual package” approach.
Either way, these proposals mean that consumers would shop for a loan and at the same time also shop for closing services. The strange and arcane world of closings would suddenly become very competitive. In the same way that lenders now advertise mortgage rates, competitors would advertise closing package prices. Consumers, being logical, would surely look for the lowest possible costs.
With Martinez gone from HUD, it might seem as though the drive to reform settlement costs would lose steam. That doesn’t seem to be the case, however. HUD, under acting Secretary Alphonso Jackson, has sent a final proposal to the Office of Management and Budget. If approved by OMB, the rule could be in place by early Spring and then take effect sometime later.
There are concerns that the new rule will not provide a perfect resolution to the problems which now dog the closing process — as if the current system is somehow wonderful and worthy. But you have to ask: Since when is more competition a bad thing? Why is a better public understanding of the closing process so terrible? Who benefits from the present system? And who doesn’t?
The Martinez proposal has drawn opposition and with some reason: If closing costs are lowered by $8 to $10 billion a year it means someone’s income will be reduced. The catch is that if you’re a Washington lobbyist the Martinez proposal and the dual-package approach make too much sense to oppose directly, so it’s necessary to chew at the edges: Complain about the development process or the timing. Anything but the core issue, lower costs for the public.
Given the Martinez proposal or the dual package approach, I prefer the latter. The dual package idea is more competitive and would allow businesses of every size to readily vie for consumer support. Moreover, any effort to create a lender closing monopoly would no doubt wind up in court.
Credit should be given to Martinez for suggesting — and pursuing — an idea which could save billions of dollars in needless expenses each year. After all, if affordable housing is a national goal then lowering entry costs is one important way to make homeownership more widely available.
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Published originally by Realty Times on January 13, 2004 and posted with permission.
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