The uncertainty regarding proposed changes to the Real Estate Settlement Procedures Act (RESPA) has left big builders--and many in the real estate industry--in the lurch. Efforts to simplify the closing process and reduce the costs associated with buying and selling, led in large part by former HUD Secretary Mel Martinez, continue to run into heavy resistance. Martinez's decision to resign from HUD Dec. 9 to run for a Senate seat in Florida, cast the prospects for reform into sudden jeopardy. But days later, led by HUD's deputy--and now acting--secretary, Alphonso Jackson, HUD approved a final overhaul package. The new rules reportedly aim to reduce closing costs, on average, by $700 per transaction.
Details of the package won't be released before mid-March, following a 90-day review by the Office of Management and Budget. Whether the new rules will be enancted is far from clear, although mortgage industry experts are optimistic.
For builders with sizeable mortgage lending and title business units--many of whom have been gearing up to provide bundled settlement services--the regulatory limbo has made it tough to solidify business strategies heading into 2004.
The overriding concept behind the reform is to provide an easy-to-understand and competitive alternative to the current settlement process, which can require more than 20 separate services.
The pending reform would override the HUD Section 8 provision that makes it illegal for anyone involved in the settlement process to provide finder fees or kickbacks. Under the proposed rules, if settlement services from multiple providers are bundled by a single source, the fee could be distributed in any manner.
Theoretically, for builders such as Dan Winter, executive vice present of Colorado Springs-based Classic Homes, that would mean being able to assemble a group of settlement-service providers that offer him the best volume discount. That in turn would allow him pass the savings on to the home buyer, take them as profit, or do a little of both.
However, the proposed ruling changes have been stalled since being introduced in 2001 due to an unprecedented number of comments from the public and more recent disagreements about the nature of the proposed revisions.
"There have been more than 46,000 letters concerning the ruling change, when typical rule changes generate about 1,000 comments," says Jim Dufficy, vice president, regulatory council, and special council with First American Corp., an affiliate of First American Title Insurance Co.
Small settlement-service providers are concerned that bundling will allow large players to undercut their business. Mortgage brokers are concerned with a provision that would require them to disclose their rates, and other financial institutions are not sure a guaranteed settlement price can be established considering the way interest rates vary over the typical six-month period from agreeing to buy a new home until closing on it.
"The reform comes with a bit of pain," says Roger Cavendar, president of Classic Mortgage, a division of Classic Homes, in Colorado Springs, Colo. "Companies have worked hard to get best practices mapped and systems in place to address the complexities of the current system. There has been a great investment in technology and processes to offer settlement services that are cost competitive. The reform would change everything. Many have made a significant investment in time and money to keep the status quo."
Complicating reform efforts, the Mortgage Bankers Association (MBA) and Rep. Mike Oxley, chairman of the House Financial Services Committee, withdrew support for recent reform language. And various groups, including the American Land Title Association, threaten to file suits to block its passage. Yet some people, such as Donald Blanchard, Countrywide Home Loans' deputy general counsel, believe bundled packages will become a reality this year, especially if the reforms preserve a dual approach to fees. Under that scenario, there would be one price for services required by lenders to close and a separate price bundling all the other fees.
Big builders, and their affiliated companies, are struggling to determine the best course of action. Some are choosing to have multiple strategies in place; others are electing to wait and see; and there are those that are paying little attention to the matter but understand the benefit of simplifying processes.
"We are ready to go in any number of directions on this, but until the RESPA reform rulings are finalized, it doesn't make sense to finalize a specific strategy," says Melissa H. Bailey, vice president of communications with The Ryland Group, in Calabasas, Calif.
Karyl Gately, president of Shea Financial Services, in Walnut, Calif., says that some big builders have been buying providers of settlement services to offer a bundled service even before the reform was proposed.
"Over the years, we have been developing the different pieces of the puzzle ourselves," says Gately. Shea started by creating a mortgage operation, according to Gately, then added other settlement services such as escrow, title insurance, and flood insurance.
"We are in a good position for when the ruling comes out. We could work with partners and put it all together in a bundle that would be competitive," she says.
Providing simple and low-cost settlement services to home buyers is the rationale for reform, and that concept is not lost on builders. For builders who are not in a position to put together a settlement bundle for home buyers, it is likely they will be able to obtain a low-cost bundle from a third party provider.
"Presenting a single comprehensive charge for the entire product is good for the consumer," says Steve Soriano, executive vice president and CFO of Robson Communities, in Sun Lakes, Ariz. "It would allow them to easily shop around for the lowest costs and select the best deal."
Soriano adds that although the pending legislation may provide a new profit center opportunity for builders, there might not be much margin in settlement services. "The fees are lean enough already that there is not much [profit margin] left," he says.
Even if the reform is not enacted, Soriano says he sees the focus on RESPA as beneficial to the industry. "Builders should seek to trim complexity and costs wherever possible. Reductions in paperwork benefit the consumers."
While Soriano is aware of the pending reform, he says Robson, which is one of the largest builders in Arizona, is not acutely focused on the subject. Indeed, for many builders, the outcome of the reform movement is a relatively minor issue.
Bill Schulte, vice president of Hubble Homes, based in Meridian, Idaho, is like many builders that are taking a proactive approach. "We do have opened discussions with title companies to address the reform issues. It is definitely something we want to get involved with, but we want to make sure to put the customer first."
With more than 600 new homes a year, Hubble is one of the larger builders in Idaho. Schulte says he sees the need to develop a reform strategy not to maintain the company's position against the smaller builders in the state, but to keep up with national builders who may be looking at Idaho as a new market. "Larger builders who might come into the state would be partnered to provide a settlement bundle, so we have to look at this as a proactive step to maintain a competitive edge [against national builders]," Schulte says.
Tom Meyer, president of Homebuilders Financial Network (HFN), in Miami, observes that a lot of builders have had little choice but to "wait and see what is going to happen--and be in a position to jump quickly." But as the head of a company that operates mortgage finance companies owned by builders, he also points to ways builders can prepare for the potential ruling change.
Meyer says a likely benefit of reform could be that builders gain control of closings. "We think it can be meaningful if builders are in control of the whole settlement process without being in the mortgage business," says Meyer. "The reform could be a good deal financially and a good deal from the standpoint of quality closings if you surround yourself with reputable, stable settlement providers."
In preparation, HFN established an equity relationship with Fidelity National, which provides every service needed to settle a home purchase. "We are in the position to flip a switch and offer settlement bundles," Meyer says. Therefore, the more than 30 builders he provides mortgage services for are well positioned, he claims.
At the same time, Meyer warns against being the first company to offer a bundle if the reform is enacted. "You want to let the market establish the value of settlement bundle before you offer the service," he said. There are advantages to calculating pricing strategy and service offers based on an existing market. Some companies, he suggests, may want to establish a strong share of market through discount pricing, while others may want to be seen as a high-end service provider.
Whichever strategy a company follows, Meyer maintains that if RESPA reform passes, "Builders are in a great position because they have such a strong relationship with the homeowner. Whether or not they profit directly from a settlement bundle, they are still in the position of benefiting from a smooth settlement process."
Colorado Springs, Colo.-based Classic Homes was looking to benefit from the more than 600 title verification and insurance opportunities it generates each year. Winter says: "We looked at cooperative business arrangements, but when we ran into RESPA and HUD Section 8, we backed away because we would have had to establish an ownership position with a title company.
"If RESPA loosened up and makes settlement more competitive, we have to see what we can do there," Winter says. "We may shop title companies a little, pursue some type of joint ownership, or another relationship, but we would definitely look at the situation because we send a lot of business to the title companies."
With RESPA pending, Winter says he sees a new window of opportunity for his company.
The company selling the settlement bundle could determine the disbursement of funds associated with each activity. For example, a builder could use its close relationship with home buyers to sell multiple settlement bundles and then negotiate volume discounts from inspectors, brokers, lenders, insurers, and other settlement-service providers. The reduced cost could either be passed to the buyer, taken as profit by the builder, or both.
Under current RESPA rulings, it is not legal for settlement-service providers to pass finder fees among different companies.
Many small settlement-service providers are concerned they will be "WalMarted" out of business if the Republican-sponsored reform is passed. Widespread reaction resulted in an alternative reform package that allows two bundles: financial services and all other services. However, there is speculation that no reform package will be passed at all.
Whether or not HUD issues new rulings, big builders can benefit from a close scrutiny of their relationships with the many settlement-service providers needed to close a new home sale.
* Loan Origination (points)
* Loan Discount
* Appraisal Fee
* Credit Report Fee
* Lender's Inspection Fee
* Mortgage Insurance Application Fee
* Assumption Fee
* Mortgage Broker Fee
* Mortgage Insurance Premium
* Hazard Insurance Premium
* Flood Insurance
* Escrow Account
* Closing Fee
* Abstract Title Search
* Document Preparation Fee
* Notary Fee
* Attorney Fee
* Title Insurance
* Government Recording and Transfer Charges
* Pest Inspection
* Lead Based Paint Inspection
* Other Inspections