There's going to be less risk in the mortgage marketplace as a result of new rules just released by the government, but will there also be some rewards?
Less risk is a benefit by itself because it means fewer foreclosures, short sales and bailouts. But buried in the thousands of pages of fresh regulations are also huge new business opportunities for savvy lenders.
Under the new rules, to be a “qualified mortgage” a lender cannot charge more than 3 percent of the loan amount for points and fees. As analyst Laurie Goodman with the Amherst Securities Group points out, “All loan originator compensation that can be attributed to a particular transaction is included. Appraisals, credit report fees, document preparation fees and title fees are included if paid to an affiliate, but not to a third party.”
In other words, a lender can provide various closing services but the use of captive subsidiaries counts against the 3 percent cap for qualified mortgages. Alternatively, a lender has every incentive to buy closing services in bulk from independent service providers and pass the discount through to borrowers.
Why would a lender do this?
Closing is an expensive proposition. The list of charges is lengthy and they include not just the cost of doing the settlement but also title insurance and a host of miscellaneous fees that can add up to big money.
So with the 3-percent rule now in place, it's time to re-examine a marketing idea from about a decade ago.
In 2002 the then-Secretary of HUD was a Floridian named Mel Martinez. An appointee of George W. Bush — and later a senator from his home state — Martinez suggested that because lenders did lots and lots of loans they could buy closing services in bulk. They could then sell not just loans but a combination of mortgages and discounted closing services together as a bundle. The lender with the best “package” of loan costs and settlement charges would be able to sell more loans – and generate more profits.
“The aggregate could result in a savings to consumers of as much as $10 billion,” said HUD. “We also expect our proposal to promote innovation in the marketplace and inspire greater public confidence in the mortgage lending industry.”
The real estate industry was not entirely thrilled with the Martinez proposal. One problem was that $10 billion in savings meant lower closing fees and smaller checks for closing agents.
The other objection was to the idea that only lenders would be able to bundle discounted closing services. The real estate industry instead proposed a “dual package” system under which both lenders and non-lenders could vie for closing business. Under the dual package approach borrowers could get a mortgage from a lender and shop for a package of closing services from either the lender or an independent provider.
The Martinez proposal got lost in the emerging go-go mortgage market that led to the foreclosure crisis, but with the new rules just announced by the federal government the opportunity onceagain presents itself for lenders to bundle closing services with loan originations.
Bundled closing services can be a huge marketing advantage for savvy lenders and it will be interesting to see which lenders move fastest with package deals.
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