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New mortgage-shopping concept studied

Federal officials are giving serious consideration to a concept that would radically alter the way millions of American home buyers and refinancers shop and pay for a mortgage.

Under the change in rules, lenders themselves, not the borrower, would be expected to contract for most application- and settlement-related services. Lenders would either quote costs as a lump-sum package deal, payable by the borrower at closing, or would roll them into the loan financing itself and quote them as part of the annualized interest rate.

Borrowers could call lenders or visit them electronically to compare alternative package deals. Under one scenario, you would phone Lender A, explain the size loan or cost of the house you're trying to finance and get back a quick quote sounding something like this: We can offer you a $125,000 30-year mortgage at 7{ percent plus 1 point with an all-inclusive settlement package of $3,750. (A point equals 1 percent of the mortgage amount and would be payable at settlement.)

Next you would phone Lender B for its best quote: $125,000 for 30 years at 7{ percent plus 1 point with an all-inclusive settlement package $300 cheaper at $3,450.

Under a second scenario, competing lenders would quote you a rate that includes all settlement charges and points. Lender C might quote you an "all-in" rate of 7} percent. Lender D might quote you slightly better, 7.65 percent. This approach would be similar to the zero-cost refinancing options offered by some lenders today.

Included in the settlement-cost package quotes would be everything from application fees, brokers' fees, credit checks, appraisals, title searches and title insurance premiums, flood inspection certifications, loan documentation, escrow agent and attorneys' fees. The lender in all cases would be responsible for obtaining these services, and presumably would have a strong incentive to keep costs low, to be competitive.

Packaged or "bundled" loan-fee concepts are prominent among the alternatives under active study by the Federal Reserve Board, the Department of Housing and Urban Development (HUD) and a joint task force of mortgage finance and consumer groups trying to streamline the nation's current, often-confusing home mortgage application and settlement process.

The two federal agencies have regulatory oversight responsibilities for the statutes that govern much of what lenders have to tell prospective applicants about the loans they're signing up for and when they have to make the disclosures.

The Fed has principal oversight for the Truth-in-Lending Act. HUD has regulatory authority for the Real Estate Settlement Procedures Act.

Lenders and consumer groups have told the agencies that the multiple disclosures now required under the two statutes are poorly timed for most comparison-shopping, are widely misunderstood or ignored by consumers, impose heavy paperwork burdens on lenders and expose them to costly litigation for minor errors.

The Fed and HUD are expected to make recommendations to Congress early next year for possible legislative changes to streamline the current system.

What are the implications of a wholesale shift to a packaged-fee approach? How might it affect you as a borrower?

On the plus side, fixed-price quotations for settlement fees might well result in lower total costs to consumers. A lender that orders 200 appraisals a month from an appraisal firm undoubtedly could negotiate a lower cost per-appraisal than could an individual borrower who orders only one, and, since $100 off an appraisal means a $100 lower quote against competitors' packages, a lender should be motivated to drive that cost down. The same should hold true in other fee areas, such as title, escrow, settlement agencies and lawyers.

Unlike the current system, consumers would know early in the shopping stage much of what they really need to evaluate competing mortgages: the rate on the note and the cash amount to complete the deal, that is, how much you need to bring to settlement.

Potential problems in the packaged approach are: By focusing lenders' attention on price alone, could the quality of settlement services rendered to the consumer be compromised? Are the appraisers, title companies and attorneys who are willing to charge the least necessarily, or even usually, the best?

Another issue: If packaged settlement costs became the norm, many small business owners _ people who run local escrow, appraisal and settlement firms _ would almost certainly disappear or be swallowed up by huge settlement-packaging organizations either owned by lenders or dependent upon their business.

Like health-care management, small players would be out. Big players would run the show.

It's too early to predict where the feds are headed on this issue, but lower costs and more effective shopping tools for consumers offer attractions for change.