Tag Archives: GFE

Two Flaws with the new Good Faith Estimate

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Let me begin by saying I think that uniform Good Faith Estimates are a huge step in the right direction. However, I’m quickly reviewing the newly revised Good Faith Estimate and HUD-1 Settlement Statement (beginning on page 46; link below) to see if any changes were made since they were unveiled. The two biggest issues that I see are:

  1. No clearly marked monthly mortgage payment.
  2. No funds due for closing.

HUD boasts that consumers will save an average of $700 by using these new forms, yet consumers won’t have the tools to compare without these two factors. It seems like HUD was so focused on YSP (which seems less clear to me on the new form) and controlling closing costs, they skipped a few important details.

Am I missing something right under my nose? Click here to read the final rule. I’ll go through this again and perhaps dig into the entire document over the weekend…I’m just wondering if any of you have more insight into this.

HUD Passes RESPA Reform, New GFE Coming in 2010

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Now I know that true miracles happen. We have all been waiting for RESPA reform for as long as I’ve been in the industry, which has been over 25 years.  Here’s what the new Good Faith Estimate will look like.  Everyone has all of 2009 to get their systems ready because the new form won’t go into effect until Jan of 2010.  The winds of change are blowing in favor of more consumer protection and more duties owed to the consumer by retail mortgage lenders.  Didn’t I just say this was going to happen? From HUD:

Brian Montgomery, HUD’s Assistant Secretary of Housing, Federal Housing Commissioner, said, “We have carefully considered the concerns expressed from every corner of the mortgage market in developing this rule. I am convinced that we successfully balanced the needs of consumers with those in the business of homeownership. None of us can lose sight of the fact that millions of Americans simply don’t understand all the fine print of their mortgages and this, in many respects, is at the heart of today’s mortgage crisis.”

Since 1974, little has changed about the process Americans endure when they buy and refinance their homes. Now, HUD’s final reform will improve disclosure of the key loan terms and closing costs consumers pay when they buy or refinance their home.

What I like about the new three page Good Faith Estimate (GFE):

Page 1:
Important Dates: “your interest rate may change” notice
Loan Summmary: Easy, plain language, Yes or No explanations
Page 2:
Understanding Estimate Charges: explains credits better than most verbal explanations I’ve heard over the past year.
Breaks down other charges that the homeowner can shop for, in order to receive a lower fee
Page 3:
Further explains pages one and two and makes it crystal clear what charges can and cannot change at closing. 

What I do not like about the new GFE:

Where’s the Yield Spread Premium (YSP)? 

Some state laws may not comport with this new federal law and will have to be revised, hence the year waiting period before we begin using the new form.

Links
Housing Wire HUD Revises RESPA Rules
HUD Press Release

APR: Just One Part of the Mortgage Machine

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One of the reasons why we have the federal Truth in Lending Act (TILA) was to help consumers gather enough information to make an informed decision on the cost of a mortgage loan.

Annual Percentage Rate, or APR is defined as the total cost of credit to the consumer expressed as an annual percentage of the amount of credit granted. APR is intended to make it easier to compare lenders and loan options.

TILA directs lenders to compute their APR using the actuarial method OR the US method. “Either method is fine,” says mortgage industry consultant Gordon Schlicke, “and both are very long, complex math equations if done by hand.” Today, we all use computer software pre-programmed to compute APR.  The actuarial method and the U.S. method will result in different APRs. This is fine because TILA allows for variances in APRs: .125 (1/8)% on fixed rate products and .25 (1/4)% on adjustable rate products.

The APR is computed on the amount financed, which is the loan amount LESS prepaid finance charges.

HUD provides suggestions for how to define prepaids.  However, our federal government also understands that different areas of the country have different local customs and lending practices so HUD allows each lender to choose how they define prepaids, but ONLY if the lender receives legal counsel to that effect.  So, for example, Lender X wants to define prepaids in their own way.  They receive legal counsel in the form of a letter on file as to how they are defining prepaids based on local custom.

So we started with a great federal law intended to help consumers become better informed as to how much a loan will cost the consumer. What we end up with is a wide variety of ways to compute APR, all of which are allowable.

Shopping for loans only using APR is a mistake. Shopping for a mortgage loan and only focusing on one piece of a mortgage loan is a mistake.  Consumers who only focus on the note rate or monthly payment and who ignore the other many moving parts of a mortgage are very easy consumers to take advantage of.  Until higher standards are in place regulating the ethical conduct of mortgage loan originators, at minimum, a consumer ought take a look at the whole picture of a mortgage loan and how it works, from the perspective of a traditional fixed rate mortgage before deciding how a mortgage product fits in with a consumer’s tolerance for risk and the tax advantages of the many, many creative mortgage products being sold in today’s market beyond the traditional fixed rate products.

Consumers, when shopping for a mortgage, don’t focus only on ONE of these pieces, instead look at the whole machine:

Monthly payment

Loan product

APR

Closing costs

The originating lending institution

The institution to which your loan will be sold

The ancillary service costs including appraisal, title credit, escrow, and so forth

And finally, the individual people working inside these institutions providing all these services most notably, your mortgage loan originator.

Obtain a Good Faith Estimate from at least three types of institutions: your favorite local bank, a mortgage broker, and a credit union. If anyone out there from a licensed consumer finance company can make a case for why you ought to be on my list of recommended institutions, please enlighten us via posting a response. 

2012 update: That last sentence was part of the original 2007 blog post when we were seeing large, national predatory lending cases at consumer finance companies such as Household Finance and Ameriquest.  With state and federal law changes, many mortgage broker loan originators have switched over from working under a mortgage broker to….the consumer finance company licensing system. We could also refer to these types of companies as “non-depository lenders,” or “non-bank lenders.”  They loan mortgage money but do not offer checking and savings.  These non-bank lenders now make up a huge market share of all the companies originating mortgage loans.  All companies lending mortgage money must follow the Truth in Lending Act: mortgage brokers, non-depository lenders, and depository banks.  Obtain a GFE from a mortgage broker, a bank, and a non-depository lender (sometimes they like to refer to themselves as “mortgage bankers” but mortgage lenders is a better description, IMO.)

Consumer’s: slow down and take the time to meet your loan originators in person. An initial F2F meeting will help you gather valuable data as to how your loan process is going to go.  Remember, an institution or a loan originator offering the lowest rate, lowest APR or lowest payment does not always mean this is the best choice.  If it sounds to good to be true, IT IS. Trust your instincts and your rational mind.