Homebuyers to Benefit From HUD Policy on Mortgage Settlement Costs

Homebuyers to Benefit From HUD Policy on Mortgage Settlement Costs

Public Interest Groups Offer Praise, and Caution, on RESPA Statement of Policy
October 16, 2001

Washington, D.C., October 16, 2001—“Housing Secretary Mel Martinez recognizes that some homebuyers, especially many lower-income borrowers, clearly benefit from being able to trade off less cash at settlement for a slightly higher loan rate,” said Frances B. Smith, executive director of Consumer Alert.  “In particular, HUD's policy on fees paid to mortgage brokers through a higher interest rate rather than cash at the table can make the difference between homeownership or not for many people."<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />


Smith is referring to HUD's Real Estate Settlement Procedures Act (RESPA) Statement of Policy released Monday, which says that yield spread premiums are legal if the mortgage broker provides services to the homebuyer, and the compensation is reasonably related to those services.  Yield spread premiums allow higher interest rates to offset higher closing costs.


Secretary Martinez also called for more and earlier disclosures of those services and their costs. Smith cautioned HUD, however, about "information overload," especially a problem in mortgage transactions, "where consumers’ eyes already glaze over at the mountains of disclosure material presented to them before and at settlement," Smith said. "Care must be taken so that regulators don't bury critical information for consumers in their search for total disclosure."


Fred L. Smith, president of the Competitive Enterprise Institute, also commends Secretary Martinez for seeking to bring some element of rationality and stability to what has been a confused area of housing policy.  “Opposition to housing market innovations, like yield spread premiums, has reflected an erroneous belief that these policies exploit lower income families.  Market opponents fail to understand that such innovations are the manner through which markets democratize the privileges long available to the wealthy.  Unfortunately, an Atlanta court’s decision (Culpepper) to certify a class action lawsuit against lenders using this practice threatens to strangle this creative response.  Secretary Martinez’s decision to provide a ruling will hopefully allow the continuation of the pursuit of the American dream for lower income families.”



Consumer Alert is a national, non-profit consumer group founded in 1977.  The Competitive Enterprise Institute is a non-profit, non-partisan public policy group dedicated to the principles of free enterprise and limited government.  For interviews, please contact the media relations department at CEI at 202.331.1010.