Technology TransactionsNew Mortgage Form Could Save Consumers $1 Billion or More
Fannie Mae and Freddie Mac have come up with a new idea that may cut consumer settlement costs by a billion dollars annually and maybe a lot more. This is good news for buyers and sellers, but in an odd way it"s likely to make some folks unhappy.
Essentially, what Freddie Mac and Fannie Mae have done is to offer a short mortgage form, something that runs three pages and can replace a 16-page document. At first this may hardly seem either revolutionary or exciting, but if you follow the dollars this gets interesting.
Settlement involves a lot of paperwork, all of it designed to assure that hundreds of years of legal precedent are met. While there are efforts underway to save trees, paperless closings are now far from common. Instead, what"s routine are settlement tables brimming with forms, certificates and documents.
Among these items is the paperwork used to create home mortgages. Such forms are not just paper, they"re legal agreements which spell out standardized terms and conditions. Use forms from Freddie and Fannie and you"ll create a "conforming" loan, one that can easily be sold to those who buy mortgages in the "secondary" market such as pensions, insurance companies and hedge funds.
In fact, even if you"re a lender and have no current interest in selling loans you"ll still want to use conforming paperwork so that you have the option of selling the loan in the future.
It"s easy to see why those who might sell loans would want to use standardized paperwork, but there"s a money problem: We"re not just talking about one or two pages of legalisms, we"re talking about 16 pages of small type and in many jurisdictions the charge for recording loan agreements is made by the page.
Fannie Mae and Freddie Mac say that in Ohio a buyer might expect to pay $148 for the long mortgage contract -- but only $36 for the new, three-page, short form.
Saving a few sheets of paper is an environmental good but not a benefit that"s easy to value. Knocking off $112 in closing costs is different, the benefit is plainly visible and instantly understandable.
Judging from loan origination numbers from the Federal Reserve for 2005, in a year we might expect to have 5.9 million conventional first liens and 1.7 million conventional junior liens. From the government we would get another 500,000 first liens. Add in 12.6 million refis and home improvement loans and perhaps we"re talking about 20.7 million loans. If the cost per loan can be reduced by $112 we"ll slash closing costs nationwide by $2.3 billion a year.
Unfortunately, that $2.3 billion is now a myth rather than a reality. Not all homes are financed. Recordation costs vary, so the savings which are possible in Ohio may not be available elsewhere. Not all loans are the same size. Also, the new short form from Fannie Mae and Freddie Mac can only be used in 27 states at this time. Still, it"s easy to see that huge savings will be immediately generated and bigger savings will take place as the use of short forms expands.
Still, given loan volume and potential saving it may well be possible to quickly reduce closing costs by $1 billion or more. Such savings, of course, are a problem in some quarters because while cutting costs may be good for consumers every dollar saved is a dollar not collected by state and local governments. The usual idea of soaking buyers and sellers with a variety of taxes, charges and fees will take a hit because of the short-form innovation.
Fannie Mae and Freddie Mac are on the right track with their short form. It"s a simple, elegant and smart way to reduce closing costs. No doubt over time it will be used more widely and with good results for buyers and sellers.
That said, when you look at the short-form concept you have to wonder how many additional forms could be modified, how many other costs could be cut and how many additional fees could be reduced. Fannie Mae and Freddie Mac, to their credit, have started the ball rolling.
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