Bundling or Bumbling?
By Charlie W. Elliott, Jr., MAI, SRA

Those of you who consider yourselves students of the financial industry perhaps have heard some of the recent buzz about the bundling of real estate settlement services as proposed by HUD Secretary Mel Martinez. Mr. Martinez has proposed a “homebuyer bill of rights,” which, among other things, would permit and encourage the bundling of settlement services at a fixed price by the lender. This would require a change in the current Real Estate Settlement Procedures Act (RESPA), which specifically prohibits the bundling of services.

RESPA was established in 1974 as an attempt to keep settlement costs down by targeting illegal, unearned fees, splits of fees, referral fees and kickbacks. The newly proposed “homebuyer bill of rights” is designed to remove regulatory barriers, permitting the offering of guaranteed packages of settlement services and mortgages, thus allowing customers more choices when shopping for mortgage loans. It is further designed to change the way lender payments to brokers are recorded and reported to consumers and to improve HUD’s Good Faith Estimate (GFE) settlement-cost disclosure, making it firmer and more comparable, allowing consumers to more easily do comparative shopping. The proposal is currently under governmental review and open for public comment, therefore the author considers it fair game for a little “kicking around.”

On its foundation Mr. Martinez’s proposal does have merit, and, if it can accomplish all, or even most, of those objectives it is designed to, it would be a refreshing change.

Promise is shown by allowing the forces in the free market to determine the price of settlement services, which is a good start. Having made this point, one must be careful not to allow one’s expectations to get too high. We must also be ever mindful of the fact that “there is no free lunch” and that “one size fits all” does not work in shoes, and it will probably not work in the case of the real estate closing services. In evaluating the proposal, as is the case of most proposed governmental regulations, one is reminded of the old adage, “I am from the government, and I am here to help you.”

It is unclear as to exactly how the bundling-of-services proposal would work since it is still in the discussion stages, but one would assume that all closing cost for a given loan would be quoted in one price, say $3,500 for a $200,000 loan. Included in this fee would be all attorney fees, recording fees, appraiser fees, overnight shipping charges, lender points and fees and other charges. For those of us who are a little slow at catching on, it may compare to an all-you-can-eat buffet, including all entrees, soups, salads, desserts, drinks, taxes and tips, all in one price.

This sounds good in theory; however, it comes with inherent challenges, which will be difficult to overcome in many cases. For starters, in the case of appraisals, neither houses nor appraisals are commodities, and neither have homogeneous qualities. In order for a lender to have a fixed price for the appraisal part of the bundle of services, it will be necessary, in most cases, to get a price quote. This is where the “one-size-fits-all” part enters the picture. Variables, such as location, property description, type of appraisal, make having one standard appraisal fee impossible. We are dealing with a situation much like that of a contractor building a house. If having an exact price is important, we must have a complete set of plans and specs prior to getting a bid for the work to be preformed. Then, we must get the bid from whoever will be performing the work. The “old swag” method will probably not work any better here than it does in the construction industry, and that is not nearly good enough.

The next question is: will the lender have the resources and the time to get bids from not only appraisers, but also everyone else in the process, particularly when the consumer is shopping with any and everyone else in the business? Sure, some of the costs will be standard, but others will not. The lender’s time is a precious commodity. Not only is time an issue, but the additional responsibility assumed when a specific price is quoted also raises its ugly head. Who pays for mistakes, misunderstandings and other cost overruns? Well, like in the construction industry, there must be a factor added to cover this cost. Weren’t we trying to hold the cost down for the consumer? This is where the part about there not being a free lunch comes into play. If we are to believe that it is feasible to expect a lender to offer a single package for any or all mortgages, or even for certain classes of mortgages, it will come at a cost.

In considering the theories and mindsets involved in implementing a successful and competitive bundling-of-services system, one would have to assume that lenders have control over all of the vendors involved in making a transaction happen as well as the cost of the services. This, perhaps, comes closest to being feasible in a small market where volume is low, properties are similar and vendors are individuals performing the work. It will probably not work on a national scale, or even on a regional scale, unless the bundled price is on the high side to cover the unknown. This is a bit like insurance where everyone pays a premium for protection received, but it is not necessarily cheap and certainly not free.

Mr. Martinez, your efforts to improve the HUD real-estate settlement-services system is applauded, and we do not question your intentions. Most of us would agree that it is time to improve the settlement-services system, which we now have, and a “homebuyer’s bill of rights” sounds great. Furthermore, we should take this opportunity to get it right. Please keep the process simple, use less rather than more paperwork, favor the free market, only pass laws which that we intend to enforce, aggressively, enforce those laws and don’t rely upon the bundling of services to reduce costs. If you do pursue the bundling-of-services system, please make it optional since one of your goals is to provide consumers with more options.

Charlie W. Elliott, Jr., MAI, SRA, is President of ELLIOTT® & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889 or at charlie@elliottco.com or through the company’s Web site at www.appraisalsanywhere.com.