NCPA - National Center for Policy Analysis

Simplifying fhe Mortgage Process

June 11, 2003

Last year, Americans closed on 16.9 million mortgage loans and paid an estimated $80 billion in settlement costs. Record low interest rates this year have unleashed a wave of mortgage business that is expected to swamp last year's numbers. Across the country, tales of botched settlements have become common.

Responding to widespread dissatisfaction, the Bush administration last year proposed rule changes that would simplify mortgage deals and transform the way the industry operates.

  • The key change would encourage lenders to offer loan applicants a single guaranteed price for closing the transaction.
  • For lenders willing to do business on that basis, the government would eliminate the thicket of regulations that now make it impractical.
  • Supporters say improved efficiency from the pending changes would squeeze up to $1,000 from average closing costs.
  • The changes also would let borrowers comparison shop for the first time on the basis of just two numbers: interest rate and the fixed closing cost.

But if the proposal is to become reality, the administration will have to bull its way through opposition from tens of thousands of small mortgage-related businesses that have a financial stake in the way business gets done.

Current law does not protect borrowers from high settlement costs:

  • Lenders must provide loan applicants with a ''good faith'' estimate of closing costs early in the process, however, they are largely free to ignore their own numbers.
  • Borrowers have a legal right to see their settlement sheet -- the document that itemizes all the costs -- a day before closing, but few know to demand it.
  • Borrowers can cancel a refinancing loan for up to three days after settlement, but it is rarely done because it means starting the painful process over and possibly increasing the interest rate; in a purchase, the borrower has no comparable cancellation right.

Source: Thomas A. Fogherty, "Closing Cost Surprises Sting Homeowners," USA Today, June 11, 2003.


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