EXHIBIT X-18 FREQUENCY WITH WHICH A BUYER IS INFORMED OF A LENDER'S CONCLUSIONS Among the five specific settlement service providers that are evaluated in this part of Volume II, the mortgage lenders assume the greatest responsibility in providing a broad range of settlement services. The lender is the most highly regulated; he is given the greatest burden in fulfilling the requirements of RESPA; he is responsible for arranging other necessary settlement services; his prices are most sensitive to continuous changes in financial market conditions; and it is the lender's evaluation which decides if a loan application will go to settlement. Despite this range of responsibilities, the delivery of mortgage financing services is accomplished within an environment that more closely approaches the model of workable competition than any other of the four that we consider. Due to the lender's diverse responsibilities, the product that he sells is particularly difficult to evaluate. The foregoing analysis indicates that despite available market information, a potentially high heterogeneous product has placed the consumer at a substantial disadvantage. Often the inexperienced home buyer finds access to relevant market information only after he has applied for a loan and after prepayments for particular items dissuade him from capitalizing on his knowledge and shopping further. The existence of numerous independently acting providers in moderate degrees of price variability in fluid market conditions suggests a relatively high measure of active price competition. A test of overall industry performance, however, is the extent to which the mortgage lending process works at providing to the consumer required services (and not providing a charging for inappropriate or unexcursory services) at near the lowest possible cost. Given the nature of secondary market requirements, some services required by lenders may mistakenly appear unnecessary from the consumer's perspective. Yet some lenders clearly do require services that are redundant or exceed their own and secondary market legitimate needs to ensure the safety and security of mortgage loans. Second, the industry appears to work best by capitalizing upon tied relationships, but overall, the industry does not appear to actively pursue a policy against abuses that can develop out of these relationships. Finally, the industry has not taken positive steps towards reducing customer confusion and limiting the heterogeneity that characterizes the terms of mortgage financing. Many of the costs associated with real estate settlement are the result of requirements for an efficient secondary market. spite of these requirements, a more uniform product or one more adaptable to consumer interests could develop if accompanied by effective initiatives. The overall assessment of market preformance in the mortgage lending industry is fair to good. It appears to deliver a required product efficiently and at reasonable cost. But it follows too rigidly the perceived requirements of the secondary market and is not sufficiently sensitive to the impact pursuing this course has on the cost to the consumer. XI. PERFORMANCE OF THE PRIVATE MORTGAGE INSURANCE INDUSTRY Private mortgage insurance is generally required of lenders when the loanto-value ratio (LTVR) of the mortgage is less than .20. In providing this service, the mortgage insurer agrees to absorb a set portion of the loss that would result from a borrower's defaulting on his mortgage loan. This insurance facilitates high LTVR loans by allowing the lender to transfer to a third party some of the risk inherent in such mortgage lending. Mortgage insurance is similar to title insurance, in that it does not explicitly benefit the consumer (the home buyer), but is required by the lender. Typically, the mortgage insurer and the home buyer never meet or discuss characteristics of the service, payments options, or its cost. However, the home buyer almost always directly pays for mortgage insurance. Therefore, there is ambiguity as to who is the buyer or consumer of the service. In the discussion that follows, we refer to the home buyer as the consumer; the lender is sometimes called the buyer. This chapter indicates the economic performance of the mortgage insurance industry in providing required services at a reasonable cost.1 We first assess the extent to which the conditions that define pure competition are met. We then use this information, along with data on price variability, industry profitability, reverse competition and other economic characteristics of the industry to determine if active price conpetition, or what we have termed "workable competition," prevails. Finally, we examine other aspects of the provision of mortgage insurance, such as consumer abuse and appropriateness of the product, which are also important in evaluating market performance in this industry. ASSESSING THE EXTENT OF PURE COMPETITION Classical economic literature tells us that pure competition results in economic efficiency, so that the consumer is being provided the product or service at the lowest possible cost. While pure or perfect competition is rare and could not be expected in the settlement service industries, it is useful to evaluate the mortgage insurance industry in terms of its four specific conditions of pure competition. The degree to which these conditions are met provides some indication as to whether the market is performing well at providing services efficiently and at a reasonable cost, that is, whether reasonable competition prevails. It also may suggest what characteristics of the market might be changed in order to achieve a higher level of market performance and consumer satisfaction. 1A cost which approximates the lowest possible cost of providing the service. |