Another grave defect in the FHA studies in the past has been that they have been based upon the closing statements in FHA transactions. FHA transactions today are only a very tiny percentage of all transactions, and I think any adequate study is going to have to embrace charges made in a great many kinds of situations. The Administrator and the Secretary are given authority to set fair charges. It is quite difficult to find out what fair charges are until you know what pricing is used in all kinds of transfers in the community, not just those in which an FHA mortgage is used.

The bill itself gives no idea as to the scope of the study, or as to how it is being carried out. And I don't know whether it is possible, in such a bill, to delineate the actual methodology that will be used. But it seems to me what is needed is a comprehensive study on a national scale, and such a study should be carried out by an independent agency. That agency should be authorized to obtain information from other agencies which have control over mortgage lenders. The overwhelming bulk of homes today are sold on the basis of mortgages, and the mortgagees have the information, whereas the FHA does not. The Federal Home Loan Bank and the Federal Reserve could probably give us better information than the FHA. In saying that, I don't mean to exclude the FHA and VA. They have vaulable information. But it is highly partial information, and should be read in the light of data obtained from other sources also.

Now, with regard to the right to fix closing costs, I might say initially that some closing costs are outrageously high. Others are outrageously low. A very careful study should be made of what they are, before the power-if it is granted-is exercised. If the charges are fixed too low, they can have a disruptive effect in the mortgage market, and can adversely affect the capacity to place FHA loans. It is the policy of this committee to promote FHA loans, rather than to discourage them.

There is also the danger that if the closing costs are fixed at a particular maximum, that maximum will then become the minimum. At the present time, unquestionably in many transactions involving conventional mortgages, the closing costs are lower than the prevailing costs for FHA loans. The FHA system has caused costs to increase rather than to decrease. I believe it is the policy of the committee to decrease the costs where possible.

There is another factor that has not been discussed as far as I know, up until this time, and I would like to suggest it to the subcommittee. Costs should not be studied without consideration of the services which are being rendered to buyers of homes. The buyer of a home ought to receive personal representation and some formal proof of title. As a matter of fact, he is not getting these today. The whole system is designed to protect mortgagees, rather than home purchasers. I think this is an area in which considerable study is needed.

I would say, by the way, that the evidence I have up until this time indicates little or no relation between costs and the services rendered. Where very high costs prevail somewhat greater services are frequently but not unusually available. Where very low costs prevail services are generally minimal. But there are not universal rules and in intermediate cost areas no correlation between cost and services is discernible.

What is needed at the present time is simply adequate information, and unless the Congress acts first to obtain this information, I frankly think it is wasting its time and its money, and it is running the risk of further disrupting the mortgage market.

It is my feeling that section 2 of the Senate bill 3442 should be reexamined in the light of these considerations.

The CHAIRMAN. Thank you very much. That is an interesting discussion, and it is one with which we are concerned. Of course, in our recommendation on the Commission we did relate to the FHA and VA mortgages. Of course, I am hopeful and I am sure other members of the committee are too that you may be able to work out a system that would refer to conventional mortgages as well as to FHA and VA.

We know there is a lot to do with reference to making uniform these services for which the charges are made. Uniformity of mortgage forms, for instance, foreclosure procedures, right of redemption. Many things need uniformity if we are to get uniformity not only in closing costs but in the handling, particularly of conventional mortgages. Senator Tower?

Senator TOWER. I have no questions, Mr. Chairman. I think it was a very fine presentation.

The CHAIRMAN. Mr. Payne, Senator Proxmire has not been able to get here. He will be here later, but he has submitted a list of five Questions that he would like for you to answer. I should be glad to turn these over to you, and when you have the time in the very near future, I don't know how long the record will stay open, probably a week or 10 davs, but if you could answer these questions it would be appreciated.

Mr. PAYNE. I will be glad to answer them by letter as soon as I get back to Tuscaloosa.

The CHAIRMAN. Thank you very much.

(The complete statement of Mr. Payne and a letter regarading the above questions follow:)

STATEMENT OF JOHN C. PAYNE, PROFESSOR, UNIVERSITY OF ALABAMA

My remarks today will be addressed to Section 2 of Senate Bill S. 3442. As I read the Section, it provides for two types of action: first, it empowers the Secretary of Housing and Urban Development and the Administrator of Veterans' Affairs to establish standards of allowable settlement costs in the financing of F.H.A. and V.A. mortgages; and second, it directs them to undertake a joint study and make recommendations to Congress not later than July 1, 1970, "as to actions which should be taken to reduce mortgage and settlement costs and to standardize these costs for all geographical areas."

I am entirely in sympathy with the objective expressed in the bill of obtaining information about existing settlement costs. Whether costs should be reduced is a matter about which only a qualified opinion is possible. In some areas, they are unquestionably too high. In others, they are too low to permit adequate services to be rendered purchasers of homes. Whether it is either possible or desirable to attempt to standardize settlement costs is also an uncertain matter. Costs vary excessively, depending upon such factors as the nature of the particular transaction, the custom of the particular area, and the demands of the lender. If standardization is to come without serious disruption in the mortgage market. it will have to come slowly, after we have first acquired adequate information upon all the factors involved. For reasons which I will state later, I question whether a study of existing costs should be carried out by the agencies named and suggest that an independent investigation is desirable.

At the outset it is necessary to realize that we have no truly reliable information on settlement costs (and by this term I presume that you mean what is generally referred to as "closing costs"), and that we lack even a common understanding of what items are embraced under the general heading. At the present time I am completing a preliminary survey of closing costs on a nationwide basis and have obtained information from 483 informants in all of the states and the District of Columbia. As far as I know, this is the only effort ever made to obtain information on so wide a geographical scale. In this survey the coverage is so thin that any conclusions are of the most tentative nature and, at best, indicate areas in which study in depth is needed. I will not attempt to summarize the substantive findings, but certain salient points should be brought to the attention of the Sub-committee. In the first place, there are gross variations in costs even within a limited geographical area. There are also highly different patterns of costs in different sections of the country. Furthermore the amount may vary with the method used to establish title and with the kind of mortgagee. For example, it generally costs less to establish title where abstract practice prevails than where either direct search of the records of local title insurance are employed. Again, banks and savings and loan associations charge less than mortgage and insurance company mortgagees. All this is highly tentative, but it indicates that any kind of useful information will necessarily be of a rather sophisticated nature.

The very limited information about closing costs which we have had up to this time is unsatisfactory for several reasons. In the first place, comparisons have been made of unlike transactions. For example, the cost of transferring land normally varies in direct ratio to the amount of the purchase price or mortgage financing. It is meaningless to talk about the "average" costs entailed in purchasing houses valued at $15,000 to $25,000 dollars. Proper comparisons can only be made where we assume a common base transaction-say a $20,000 house financed by a $16,000 mortgage. Other factors can cause wide variations in costs. If a house is financed by an F.H.A. mortgage given to a mortgage company, the probability is that a survey and title insurance will be required, with attendant increases in charges. If the same purchase is financed by a conventional mortgage given to a bank, the demands of the lender and the consequent costs will probably be less.

Earlier studies failed also because they were limited to relatively small geographical areas. The evidence we now have shows that geography and prescription may have dominant influence upon the amount of closing charges. If we are to have meaningful information about closing costs, a comprehensive study on a nationwide basis must be made.

A third deficiency in past studies has been that they have generally been limited to transactions in which F.H.A. insured mortgages were used to finance the sale. Currently F.H.A. insures only a tiny fraction of all mortgages. As I have already indicated, costs in these cases are probably higher than where conventional mortgages are used. But we do not know definitely that this is so, and more certain information is imperative if we are to establish appropriate scales of charges. The place to obtain our information is not the F.H.A., but the principal sources of mortgage credit: the savings and loan associations, the commercial and savings banks, the life insurance companies, and the mortgage companies. Our search should begin here not only because these lenders are the chief source of mortgage credit, but also because they impose different requirement and different scales of costs, depending upon their varying needs.

A fourth deficiency in prior studies has been the failure to consider the relationship between cost and services received. I suspect that the real reason for this failure has been the assumption that the needs of the mortgage lender and the borrower are the same. If this assumption were true and the lender were protected, the borrower would also be protected. But the initial assumption is false. The interests of the lender and the borrower are not identical and may be antithetical. The borrower-that is to say, the consumer in this case-needs personal representation and formal assurance of title. He frequently reecives neither, even though he generally pays most of the costs. But it is impossible to judge the propriety of the burden imposed upon him until we know what he is receiving in return.

To summarize, then, if meaningful information is to be obtained it must be searched out on a national basis, must be gathered in a form which will permit proper comparisons, and must take into consideration such variables as the

locality, the type of lender, the method of title proof employed, and the services rendered.

I have suggested earlier that such a study should be carried out by an independent agency, rather than by the Department of Housing and Urban Development and the Veterans' Administration. This suggestion is made because in the past these agencies have tended to confine their attention to transactions in which they have played a part, and they have failed to make the distinctions that are necessary if information is to be useful. But if these agencies are delegated the task of making a study of closing costs, they should be directed to work in cooperation with other agencies vested with supervisory powers over mortgage lenders. Examples of such agencies are the Federal Reserve Board, the Home Loan Bank Board, and state regulatory bodies.

Any worthwhile study will start with the assumption that the expressions "settlement costs" and "closing costs" have no clear cut meaning and probably should be abandoned. Furthermore, closing statements do not necessarily reflect the true cost of making a transfer of land. In some cases they contain items attributable to ownership rather than to the transfer. Examples of such items are found in prorated taxes and insurance premiums. In other cases, items in closing statements reflect side deals, such as the sale of chattels on the premises and the like. Finally, they may entirely omit prepaid items which are properly a part of closing charges. For these reasons, it is probable that statements of standard charges imposed by reputable lending institutions better reflect true closing costs than do the actual closing statements themselves.

For my own purposes I have divided closing costs into four distinct categories. The charges made under these different categories have little in common with each other, and a failure to distinguish between them has resulted in a great deal of confusion and misunderstanding. The first type of charge is that for selling the property. The beneficiary is the real estate agent, and the amount is generally a fixed percentage of the sales price. The second is the cost of financing. This cost varies from day to day and depends upon the state of the financial market. It can, in turn, be broken down into three sub-categories: (1) interest; (2) financing charges designed to increase the return of the lender, such as origination fees, discounts and "points"; and (3) costs incurred by the lender, such as appraisal fees, premiums for mortgage insurance, and the like. Interest, unless prepaid, is generally not included in closing statements and is not paid at the time of closing. Financing charges designed to increase the return of the lender may or may not appear in the closing statement, but they are ordinarily paid before or at the time of closing. Costs incurred by the lender are normally paid at the time of closing and are embraced in the closing statement.

The third category of closing costs includes charges for establishing title and the security interest. Typical charges are those for bringing abstracts up to date, examining abstracts or the original records, obtaining title insurance, drafting, supervision of the closing transaction, etc. The variety of methods used in listing these charges makes any orderly sub-categorization impossible. For example, in one community an attorney may make a single charge-determined by a percentage of the sales price or the amount of the mortgage-for doing all legal and some non-legal work required. In another he may make separate charges for each of several services rendered. Practices may vary from community to community. from attorney to attorney, and from one lender to another. The result is a state of chaos which will be difficult to resolve and then only by the most careful and exhaustive study.

A fourth kind of closing cost is fees charged by governmental agencies. Transfer taxes, recording fees, and documentary stamps are illustrations. They are fixed by law and are independent of selling costs, financing charges, and the fees demanded for establishing title and the security interest. They may vary from the nominal to as much as two percent of the selling price.

What has been said above is an oversimplification of an extraordinarily complex problem. Time does not permit a more elaborate treatment. In conclusion, I should like to express as strongly as I am able two thoughts which may be of value to the Sub-committee in considering S. 3442. The first is that unless a much more elaborate study is undertaken than seems to be contemplated in Section 2 of the bill. the information obtained will at best be of no practical value and at worst be misleading. It is highly improbable that any acceptable ey can be carried out prior to July 1, 1970, and if the Congress sees fit to orize a broader study than presently contemplated considerably more time ld be allotted to carrying it out. The second is—and here I repeat-the

power of fixing and standardizing scales of closing costs should not be exercised until we have much more information than is now available. If costs are fixed too high, the public will be forced to pay more than is fair. If they are fixed too low, lenders, title insurance companies, and attorneys will be discouraged from participating in F. H. A. and V. A. transactions. The purpose of the Congress is to promote the use of F. H. A. and V. A. mortgages. These mortgages are difficult to place in the present market because of their low yield. It would be unfortunate if a further impediment were placed in their way by the fixing of unrealistic closing charges.

THE UNIVERSITY OF ALABAMA,

SCHOOL OF LAW,

Tuscaloosa, Ala., March 12, 1970.

Senator WILLIAM PROXMIRE,
New Senate Office Building,
Washington, D.C.

Dear SENATOR PROXMIRE: At the hearing last Friday before the Subcommittee on Housing and Urban Affairs, Senator Sparkman turned over to me your list of questions. I will do my best to answer them but caution you that in most cases I will have to give an informed opinion, rather than a positive statement of fact. 1. You ask about the variation in the cost of "title insurance and title costs" on a $30,000 home in Manchester, New Hampshire ($50.00) and in Buffalo, New York ($586.96). You put the questions: What accounts for this variance? Is there much of a difference in the cost of supplying title insurance in various parts of the country? I will try to answer these queries in order.

(a) In the course of my own survey, I received no information from Manchester, New Hampshire. However, it is located in a very low cost area. In my survey, I predicated the sale of a $20,000 house financed by a $16,000 mortgage. In my analysis of the questionnaires returned, I lumped all costs for establishing title and the security interest, whether paid by the buyer or the seller. The lowest cost reported was $18.00 and the highest, $820.00. The median for the entire country was between $255.00 and $211.00, depending on the type of lender. For New Hampshire the minimum was $55.00, the maximum $276.00, and the median between $100.00 and $157.00. Title insurance is ordinarily not used in New Hampshire and I suspect your informant gave you the cost of personal search of the records and an attorney's certificate of title. If title insurance were obtained it would be supplementary to the attorney's certificate, and would be issued by a "national" company at the national rate of $2.50 per thousand for mortgage coverage and $3.50 for owner coverage.

Joint owner/mortgage coverage would be given at the owner rate, plus a small extra premium. Buffalo is located in New York, where the highest title costs in the nation prevail, except in New Jersey. In my survey the lowest reported cost from New York was $180.00, the highest $685.00, and the median between $436.00 and $486.00. My report from Buffalo is that titles there are established on the basis personal search of the records. "The only time title insurance comes into play is when there is an objection to title which cannot be cured other than by title insurance."

(b) The gross variations which occur throughout the country, or even within a single city, can be accounted for in part by the kind of mortgage lender, the type of title assurance used, and the size of the city. However, the data I have collected indicates that the primary influences are geographical and historical. For example, there is an area characterized by high costs running from Rhode Island and Connecticut down to Virginia. Other states where high costs are most marked are Florida, New Mexico, Arizona, and Nevada. By contrast. costs are generally low in the great mid-American heartland. In your own state of Wisconsin costs, where banks and savings and loan associations are mortgagees, are among the lowest third in the country and where mortgage or insurance companies are the lenders in the middle third. These findings are tentative and based on a narrow sampling. However, some of the information was so consistent that reliance is justified until better data is available.

(c) If you are asking about the cost of title insurance simply, and not the whole cost of establishing title, the rate for "national" insurance, i.e., that in support of the certificate of an independent attorney who has examined the original records or an abstract of title, has already been given. We do not know much about rates for "local" title insurance, i.e., insurance issued after a company has