Category Archives: Industry Talk

New vs Old Good Faith Estimate

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NOTE:  This is just my interpretation of the new GFE and I am only a mortgage originator and blogger. This post is just based on my opinion.   Please check with your compliance department at your mortgage company to learn about the GFE requirements.

In a matter of days, all residential mortgage originators (we’re actually referred to as MLO’s now:  Mortgage Loan Originator) will have to adapt HUD’s new Good Faith Estimate…warts and all.   I promised Ardell that I would show her a comparison between the old and new GFE.   I won’t be covering everything line by line on HUD’s new page Good Faith Estimate–I’ve done that all ready…so some parts of this three page extravaganza may be missing from this post.

Page 1

Important Dates (click on image to for better viewing)

ImportantDates

This is a new feature to the good faith estimate.   GFE’s now have an expiration date if not acted upon by the borrower and certain costs are guaranteed for specific time periods.   Sounds great–EXCEPT I think you’ll find many MLO’s not willing to prepare a good faith estimate to the average “rate shopper” since HUD has spelled out that IF a good faith estimate is provided, it’s presumed that the mortgage originator has enough information to have a complete loan application.

In addition, line two states that MLO’s are held accountable for the third party closing costs they are using in their quote for 10 business days.   So if I rely on an escrow rate sheet from Tim’s company, and they happen to adjust upward during those 1o business days and the consumer decides to proceed with the rate quote, I could potentially be on the hook for the difference.   In reality, there is no way for a MLO to guarantee a third party fee unless they are willing to “eat the difference”.

Summary of your loan (click on image to for better viewing)

SummaryOfLoan2

This section gives you the basics of your loan.   For this estimate, I’m using an FHA loan and as I mentioned in my previous post, some of the details may be wrong.  For example, this references “initial loan amount”…as I write this post, I’m not 100% sure if this should be your base loan amount with an FHA loan or total loan amount (base plus the upfront mortgage insurance which may or may not be financed–perhaps that’s the fine detail: whether or not the borrower finances the FHA upfront mortgage insurance)…I’ve checked HUD’s FAQ’s (all 51 pages based on the latest update last month) and cannot see where this is addressed… anyhow… I went with base loan amount since other closing costs (such as origination fee) are factored off that figure.

Everything is pretty self explanitory…my issue with this section is the fourth line down:

“Your monthly mortgage amount owed for principal, interest, and any mortgage insurance is: $1648.31”  

This payment does not include taxes or insurance.  On the old/existing GFE, my clients actually see a total payment (PITI) of $2008.21.   PITI is gone on the new Good Faith Estimate…I don’t who’s bright idea at HUD this was…now we have PIMI:  principal + interest + mortgage insurance even though the borrower still makes the PITI payment.

Even the next section, escrow account  information, restates the “PIMI” where the GFE could have at least stated what the estimated escrow payment (real estate taxes insurance) would be so that consumers could add these two figures together to come to their actual mortgage payment…but no…that might make a bit of sense.

The bottom of page one refers to closing costs that are shown on page 2…which I will address on the next post.

Ring Out the Old, Ring in the New Good Faith Estimate

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Today between “actual work” Ardell and I were tweeting (on Twitter of course) about the new Good Faith Estimate.

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During our dialogue, I offered to share a comparison of our exiting Good Faith Estimate, which we have around for loan applications effective ten more days before we are required to use HUD’s new  Good Faith Estimate.

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The new estimate is highly controversial and you may hard pressed to find many mortgage originators who like it.  I am for having an uniform document for consumers to use when selecting their mortgage–I don’t think this will do it.  I’ll get into more of that later (perhaps on another post if this one rambles too long).   Right off the bat, there are serious flaws with HUD’s attempt at improving the GFE:

  • There is no “total mortgage payment” or PITI (sum of principal, interest, taxes and insurance).  The closest thing we have PIMI (principal, interest and mortgage insurance).
  • There is no section for total funds due for closing.
  • There is no section for seller credit.
  • The owners title policy must be shown on the Good Faith Estimate even though in our area, it is customary for the seller to pay for it.
  • Loan originators who prepare a good faith estimate for a consumer are “presumed” to have obtained enough information for a loan application and are therefore bound by certain costs (including third party) for a specific time period.

This comparison is for a purchase using an FHA insured loan for financing.  I have to admit, I’m not 100% certain if the loan amount on the new GFE is suppose to be the base loan amount or the base loan amount plus the financed upfront mortgage insurance premium–I can’t find that addressed anywhere in HUDs 51 page FAQs on this new document.  I’ll correct this post if it turns out I’m wrong (I’m just using the base loan amount).

The new Good Faith Estimate consists of three pages, HUD added two additional pages even though this is suppose to streamline the process and make things easier for consumers to understand.   I’m not going over it line by line in this post, I am going to review what I feel is most important…and I’ve just decided this will be series (since I can see I’ve all ready rambled too long).

Watch for part 2 where I cover page 1 of HUD’s new Good Faith Estimate…coming soon–January 1, 2010!

NOTE:  This is just my interpretation of the new GFE and I am only a mortgage originator and blogger. This post is just based on my opinion.   Please check with your compliance department at your mortgage company to learn about the GFE requirements.

The “Never Ending” Homebuyer Tax Credit

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Do you only have until April 30, 2010 to get into a binding contract on a house, in order to collect your $8,000 “1st time homebuyer credit” or your $6,500 Homebuyer Credit? Lots of discussion going around about that. Some say the credit is never, ever going to go away. I find that hard to believe…unless.

When someone buys a house, they seem to be more focused on getting $8,000 than they are about the mortgage interest and real estate tax annual deduction on their income tax return. What do you think about eliminating the long term benefits of these write offs, in favor of ONLY a one time up front credit? No annual Mortgage Interest Deduction. No annual Real Estate Taxes paid deduction. Just a one time up front cash back for buying a principal residence?

Seems to me the government can recoup all of the money spent on the up front credits and then some, by eliminating the long term write offs in exchange. Of course homes purchased prior to the change would have to be grandfathered and only homes purchased after X date would get the up front vs. the long term tax benefit. Maybe they could give the homebuyer the choice of which they want. A one time election in the year you purchase the house?

Unless the government is taking something away in exchange, I really see no basis for the Homebuyer Credits being extended ad infinitum. Your thoughts?

Will Banks Cash In on the New Good Faith Estimate

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The new Good Faith Estimate will be required to be used on all new loan applications effective January 1, 2010.   Part of HUD’s GFE may include a service provider list which consists of title and escrow/settlement providers (boxes 4, 5 and 6; section b on page 2 of the GFE).  This list (if permitted by the lender) is important to the consumer as it will determine what the cost difference can be between the good faith estimate and the settlement statement at closing.  

hudboxes3thru6

If a borrower relies on a service provider (title and escrow/settlement services) on the list given to them by their mortgage originator with the good faith estimate, there is a 10% tolerance.  This means that if the cost at closing comes in more than 10% higher of the sum of those fees than what was provided on the good faith estimate, the lender will pay the difference (or credit the borrower) over the 10% sum of those fees.   However if the lender permits and the borrower to shop for their own title and/or escrow vendor, the loan originator is “off the hook” should the fees come in higher at closing.

Per HUD “if no service providers are listed, then it is assumed the customer could not shop and fees will be bound by the tolerances” and that “lenders are responsible for fee requirements listed by their loan officers or the broker”.     

If the lender “permits” the borrower to shop for title and escrow services, they must provide this written list which must include at least one service provider on a separate sheet of paper and then the lender is subject to the 10% tolerance (based on the aggregate of those fees).

I see this as a huge opportunity for the banks similar to what we’ve witnessed with HVCC.   This is their big chance to control where escrow and title go–to them!    Banks will state that they do not want to risk being off on their quotes with new binding good faith estimates and it’s my belief they will do their best to keep escrow and/or title “in house” or affiliated providers.    Some mortgage brokers may find that they will have to use the banks preferred title and escrow vendors just as they do the banks appraisal management companies.     Should this happen, we may see banks use low cost centralized services, similar to many bank processing centers (some are even located out of state).

How will borrowers know how to select or shop for a title and/or escrow company?   Can they rely on their bank loan originator to help them select a title or escrow provider when the MLO (Mortgage Loan Originator) is directed to only have the bank’s providers on the list?    The new RESPA laws will not allow MLOs to recommend anyone who is not on the service provider list.    Should the consumer rely on their real estate agent to recommend the title and escrow provider (many brokerages have joint venture relationships)?

With a purchase, if the title and/or escrow service providers are other than those designated on the written service provider list, then it is presumed that the buyer/borrower selected those providers (even if it was directed by the real estate agents or seller) since the buyer agreed to the contract.   With this scenario, the lender is not subject to the 10% tolerance in fees for those costs.    Buyers may find a surprise comparing the good faith estimate at signing to the HUD Settlement Statment if the title and/or escrow company are different from what was designated on the purchase and sales agreement.

The new Good Faith Estimate may wind up being a huge set back for independent escrow companies and smaller independent title agencies who will most likely lose any relationships they have forged with loan originators who happen to work for one of the big banks.

By the way, if you are planning on selecting your escrow and/or title provider.  You may want to start researching prior to your prequalification process with the mortgage originator.   You may find that effective January 1, 2010 most mortgage originators will not want to provide a good faith estimate until you have committed to working with them as the new GFE’s are binding for the loan originator unless certain “changed circumstances” permit the MLO to issue a revised estimate.  Per HUD:

“If a GFE is given during prequalification, the receipt of one of the six required pieces of documentation will not constitute a “changed circumstance.”

The loan originator is presumed by HUD to have the “six required pieces of documentation” if they issue a good faith estimate.

…I’ll be writing more about this on a future post.

Zillow Adds Rentals

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Today Zillow announced the addition of rental listings and search to their arsenal of tools for consumers. Now anyone can list a home for rent, and Zillow users can now search both rental homes and homes for sale in their area. Consumers can do a map search by monthly payment for both for-sale and for-rent homes simultaneously based on a monthly payment they can afford.

According to a recent Harris poll, one in four people who plan to move in the next three years say they will search for both homes for rent and homes for sale. This may be a function of the current economy. Sellers may choose to rent their homes now, rather than sell at a lower price than they could have received a few years ago. Conversely, these same home owners may choose to rent their next home when they move if they can not sell their home now.

Zillow is launching a new “rent vs. buy” comparison search that allows consumers to use a “monthly payment” filter to calculate what they can afford to purchase using the current day’s local mortgage rate for a 30-year fixed mortgage. Zillow already has a massive amount of real-time data on mortgage rates built into their “Mortgage Market” feature that they can draw from.

Zillow rental example

Zillow plans to offer landlords and agents a Featured Listing rate of $9.95 for 180 days, whether it is a listing for sale or for rent. Featured Listings can include unlimited photos and links to outside websites. With Zillow’s ZIP code, neighborhood, monthly payment, and map search functionality, I imagine Zillow will give even free Craigslist some serious competition.

Buy Now or be Priced Out Forever!

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I once heard that an Ocean Front property could have been purchased for $70,000 back in the 70’s. That property is over $4 Million dollars today. If I could turn back time…I would buy that. Not to make money on it. To own it. To enjoy it. For generations of my children’s children to enjoy.

This afternoon I will be at a home inspection of a house my clients are buying for slightly less than $300,000. The wife cried when the seller accepted their offer. It’s the kind of house some people would turn their nose up at and say “I’d rather rent”. But I can’t help but think of how my children in L.A. would celebrate being able to buy a house like this, just as my clients are. Having a yard for the kids to play in. Buying most any house for $300,000 or less is just not an attainable objective for many people who want and need to live close to where they work.

Many homes this year could be had for $100,000 to $150,000 less than in 2007-2008. This has been a great year for some of my clients who could not buy a home last year.

“Buy now or be priced out forever” is a phrase that is often joked about…but…sometimes it’s true.

How Does a Short Sale or Foreclosure Impact Your Credit

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Ardell posed a question on her last post about credit scoring that I’ve been meaning to address here at Rain City Guide on how credit scores are impacted by short sales or foreclosure.    When I was speaking at the Mortgage Girlfriends Mastermind Retreat in Scottsdale this summer, I had the opportunity to meet Linda Ferrari, a well known credit expert and author of “The Big Score – Getting It and Keeping It” (a book I highly recommend everyone read).   

According to Linda, “a foreclosure can drop a credit score 50-250 points (this includes points all ready lost to delinquent payments).   The difference in point loss depends on how many points someone has to lose in the payment history factor of his or her credit report.   Thus is someone has a 750 credit score and they opt to foreclose, their score could drop 250 points.  However if someone has a 500 credit score, they may only lose 50 points for the same derogatory.”

It hardly seems fair to me that someone who has established excellent credit and they are faced with a huge financial hardship, they’re penalized on a greater scale simply because they have “more to lose” (reminds me of our income tax system)!   With a foreclosure, you can expect to wait about 5-7 years to purchase your next home (based on current guidelines) assuming a mid-credit score of 680 and a 10% down payment for conventional financing.  

A deed in lieu of foreclosure may impact credit scores the same as a foreclosure depending on how it is reported to the credit bureaus–they don’t have to report it as a foreclosure…if they do, the credit will be scored as such.    Here’s what Linda recommends you try negotiating how the deed in lieu is reported on your credit with the lender in preferred order:

  • Paid As Agreed.  Credit scores will have already dropped over 100 points due to default in payments; however, if reported as Paid As Agreed, the borrower will be able to purchase another home in a shorter time period.
  • Paid Settlement.  Credit scores could drop 75-100 points in addition to the points already lost for delinquent payments.
  • Foreclosure.  Credit scores could drop 100-150 points in addition to the points already lost for delinquent payments.

    • One advantage of a deed in lieu of foreclsoure is you may be able to purchase a home, if you so desire, a minimum four years afterwards with 10% down payment, based on current guidelines.  

    A short sale is potentially the least damaging to your credit scores assuming you’ve been able to make mortgage payments on time.   According to Linda, credit scores may drop from 50-150 points (depending on what else is going on with your mortgage and credit history).    You may also be able to buy a home quicker using this route.   Linda Ferrari writes on her blog why you may not want to consider using a short sale as an option should you be in financial distress.  

    FHA may allow borrowers who have lost a home due to short sale, deed in lieu or foreclosure a little quicker than conventional financing–around three years depending on various factors.   Extreme extenuating circumstances may allow for a shorter time period.   Again, this is current guidelines.  I wouldn’t be one bit surprised to see FHA change this guideline to be more in line with conventional financing.

    You have to keep in mind that credit scoring is accumulative, everything is factored to come up with those three scores that are suppose to reflect your current credit.   The only real good news about credit scoring is that your scores are temporary–they are changing constantly.  Pay down a credit card, establish good payment history on your installment loan and your scores will improve over time.

    How much is your credit score damaged by ?

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    FICODid you know that if you have a credit score of 780 or higher, you might damage your score more from a single 30 day late payment, than a 680 score person might get dinged for a Foreclosure? Sad but true. Read it and weep.

    Hat Tip to Jay Thompson’s “The Phoenix Real Estate Guy”.I’m sure this chart will anger a lot of people with high FICO scores. Best I can attempt to explain this is Richard Gere will likely get a lot more flack if he spit on the pavement, than a homeless person might :). Or better yet, Tiger Woods will clearly get a lot more flack for his misbehavior than your next door neighbor.

    Personally I think the Country would be better served if someone CHANGED the system vs. simply requiring lenders to EXPLAIN how it works. I screamed aloud the day risk based pricing via credit scoring passed. But people looked at me like I had two heads. I wish more people were screaming with me that day…

    Hug Your Escrow Officer and Funder Day

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    hugThe original expiration date of the first time home buyer tax credit is today.   This means that escrow companies, title companies, funders at mortgage companies, courthouse runners, the county recording clerks and anyone else who is involved in the final process of a real estate transaction are very busy today due to the increased volume.   I expect receiving recording numbers to take bit longer than usual.

    I hereby declare today, November 30, 2009 National Hug Your Escrow Officer and Funder Day.   Give ’em a break and show extra compassion and patience for the what they may be experiencing today.  

    Perhaps this should be an annual (if not daily) event.

    Hugs!  🙂