The Federal Government has become even more involved in the business of mortgages. This time, Uncle Sam’s goal is to help consumers handle the confusing job of selecting a mortgage, selecting a lender, and selecting a mortgage consultant. On the surface, however, it appears the new regulations will only help a mortgage shopper make decisions based on price. But as so many borrowers and home buyers have discovered the hard way, “price” won’t help at all if the loan does not close.
Federal rules now require lenders to provide a new standard three-page Good Faith Estimate to applicants. This document urges consumers to shop around for the best mortgage (“best” only means cheapest – according to the Feds). And supposedly, it will let them compare mortgage programs from different lenders. The new rules seem to push consumers to shop for a loan “price” and not try to find a true mortgage professional to handle their transaction. Is the Fed making the assumption that all mortgage professionals are created equal and shoppers need only look at price? This isn’t true in any business. Mortgages are a complicated business and a very critical purchase for anyone to make. Making decisions based on price will leave many mortgage shoppers unhappy and frustrated during their transaction.
The new rules were announced by the Department of Housing and Urban Development (HUD in November 2008. It is a part of the Real Estate Settlement Procedures Act or RESPA, which was released in 1974.
Will it work? One of the ancient problems with shopping for mortgages is that the lender with the lowest “advertised” rates often isn’t offering the best overall deal in terms of “total” cost. High closing costs and fees can erase the benefits of the low rate. And, often un-noticed features like prepayment penalties can banish that low rate completely. Even the most sophisticated borrowers can get confused with the mad array of rates, “points” (paid in exchange for a lower rate), origination charges, fees and other included costs. Many lenders itemize other confusing and miscellaneous charges such as processing and delivery fees.
The new Good Faith Estimate addresses these issues by requiring lenders to wrap all the fees they control into one “origination charge.” When comparing mortgages, borrowers can focus on the “origination charge” and the interest rate. The “adjusted origination charge” will include any points paid to lower the rate.
If you have purchased a home in the past, you know the Good Faith Estimate is nothing new. But lenders had their own version of the document and it often made it difficult for borrowers to compare from one lender to another. With a standard form, it is supposed to be less confusing. My bet is I will have more questions from bewildered borrowers than ever before once they see this form.
Under the new guidelines, lenders and mortgage brokers will be required to give consumers the 3-page Good Faith Estimate within three days of receiving a loan application – if enough information was provided by the borrower to prepare the document.
Lenders are not allowed to increase the origination fee from what was shown in the estimate – unless the fee is redisclosed. Some charges not included in the origination fee include title services and recording charges. These charges can increase by as much as a combined 10% from the original estimate. Estimates for other charges, such as homeowner’s insurance and other services provided by third parties selected by the borrower, aren’t subject to such limits.
Title insurance typically is the largest fee. The new forms let consumers know they don’t have to accept the insurer suggested by the lender. Borrowers can shop around for title insurance if they wish. Note that in New Jersey, title insurance rates are set by the State Banking Department. Title companies cannot set the rates in New Jersey.
The Closing Agent or Title Company – whoever handles the closing - will be required to issue a new version of the HUD-1 (Settlement Statement) at the closing. This new HUD-1 will include a comparison of the estimated and final costs, as well as a summary of the loan terms.
These new guidelines are a monumental change for the industry. Problems are anticipated since many of the requirements are ambiguous.
But here’s a big gap that the new rules and revised GFE does not cover. It freely permits (almost encourages) lenders to lie like never before. Let’s say you have a less than honest loan officer who quotes lowball rates and fees to customers just to get their business. So, the 3 page Good Faith Estimate is prepared and given to the mortgage applicant. The applicant see the numbers and it looks like they hit the lottery. Wow, absolutely no one came close to the low rate and low fees on his estimate. The applicant thinks he’s a big winner and a smart shopper.
But hold it. Nothing in the new rules say the lender can’t quote low or erroneous rates/fees. The rules say this: The charges cannot increase without being redisclosed three to seven days in advance of [the borrower] signing the final paperwork. Guess what? That’s right. A deceptive loan officer lies like a rug to get you to commit to doing business with him. Then on day 37 of a 45 day process, he is finally forced to tell the truth about your rates and fees. And what do you know? His fees are actually higher than other estimates received from other lenders back in the beginning. Now, at this stage in a purchase transaction, there is (thanks to other new regulations) no way on this green or brown earth that you’re going to be able to get another loan ready before your settlement deadline. You have no choice – you are stuck with the liar loan.
Even if you are doing a refinance, you’ve spent the money for an appraisal and possibly other costs. Net result: You’re out the money and the time. Not only that, borrowers who are refinancing have personal reasons involved for doing the loan in the first place. Most all cash out loans have a “personal” deadline. It’s a deadline called, “we need that money now, and we can’t wait 45 more days to get a loan from someone honest.”
Borrowers are extremely unlikely to begin a brand new loan process even after having found they were deceived. Meaning, loan officers who LIE to get consumers to apply are rewarded. Those loan professionals who tell the truth – in the beginning of the loan process - are locked out by consumers because the lie looks so much better.
This is nothing new. There always has and always will be those who loan officers who will be dishonest. Before the new rule changes, the borrower would find out at the closing table. Of course, that’s horrible as it is. But now, “lies” cannot be uncovered at closing. The truth must be disclosed at least 3 to 7 days prior. By the nature of the rules promulgated by RESPA and our government, it is even more likely that borrowers will be lied to. So, what’s the use of comparing rates and fees in the beginning if one or more lenders/loan officers have lied about the true costs?
Fact of the matter is, there will be probably be more dishonesty going on than ever before. Why? Because the government has created a process with big red neon letters that says, “Mr. Borrower, you should take this form and do some comparison shopping of costs. If/when the borrower ends up making contact with a shark, they can expect to receive lowballed rates and fees. After all, the shark knows you are shopping. How else will he get your business if he doesn’t lie?
Tip to consumers: Refrain from making decisions about your home just based on quoted price/cost information. If a Loan Officer wants to beat you at that game, they can.
Stay tuned for frequent updates on these changes.
To stay completely up-to-date on all the pending mortgage changes, to see how they will affect you, and get news about interest rates and programs, just read my weekly updates - Click for free email alerts.
{ 3 comments… read them below or add one }
I expreinced the lies of a loan officer back in 2004 and again in 2007. I let myself be hookwinked twice. My gut told me the 2nd time the guy was a fast talker, but I still fell for his lies. At the closing, my rate was higher and there was a 2% origination point instead of 1%. You’re right about not deciding based on interest rates. But how do we select someone out of the millions of you all? Not trying to be smart. I really want to know.
@Ann Griffin – That’s a fair question, Ann. I agree getting a mortgage and finding someone to work with might not be easy. The rule I live by when I need a critical service from someone is to first look at their level of knowledge and service. If they pass that test, then I look at price. Whether I’m buying a new deck, a new toilet, or a new mortgage, I am leery of the guy who’s price is too low or too different from the rest.
My suggestion is to find someone who will consult with you about a mortgage, and not just sell you a mortgage. It will be easy to see the difference. Seek a referral from friends, family or co-workers. Or you can call me the next time you need financing.
Had to say that.
Happy New Year. Thanks for commenting.
trying to find a mortgage by searching for the lowest rate is just as foolish as buying anything else solely because u think it’s the cheapest. i guess even more foolish to buy a house because of rate. i also know people will lie about the rate. lies all over the Internet about the mortgage rates.. pathetic