April 6th, 2010 2:44 PM

Revamped Good Faith Estimate Criticized as Impeding New Mortgages

If you’re a prospective home buyer exploring real estate this spring, there’s plenty to learn about, from bank-owned properties to the strict criteria for getting a mortgage these days. And now the federal government has added something to the mix, aimed at helping buyers shop for loans: the revamped Good Faith Estimate.

 

Designed by the U.S. Department of Housing and Urban Development (HUD) to help borrowers better understand the terms of their loans, the new three-page form has been a required part of the mortgage application process since Jan. 1, 2010.

Many in the mortgage industry—whom opposed the development of the new form—say it is causing so much confusion it’s actually spawning additional, explanatory forms, causing delays in some transactions, and leaving some borrowers worried about signing papers that don’t reflect what they’ll really have to pay.

Theoretically, standardized terminology and a fuller disclosure of fees benefit borrowers. However, there are equally as many problems it has created. Mortgage brokers have developed a long list of complaints about the new form. For example, there’s nowhere to show how much the borrower will pay in pro-rated property taxes. And brokers have the incentive to inflate the estimate of their fees, because once they’ve issued the good faith estimate, they can’t boost those fees, even if subsequent changes to the loan package cut into their compensation.

Before the form was redesigned, good faith estimates had no real recourse on lenders or brokers who pumped up their fees between the time a customer applied and closed the loan.

But the new form stipulates that some charges—such as the loan origination fee—can’t change at all after they’ve been quoted to a customer on a good faith estimate. Other charges, such as those for some title company services, can only increase 10%. If those fees increase more than 10% after the good faith estimate is issued, the lender must pay the difference.

In addition, the good faith estimate has a section written in straightforward language that spells out each loan’s basic terms. For example, one line says “Can your interest rate rise?” Followed by check-boxes for “No” and “Yes, it can rise to a maximum of… The first change will be in…”

But HUD, which redesigned the decades-old form in the wake of the subprime mortgage crisis, says that those who are complaining about the new procedure misunderstand its intent. A document on the HUD website devotes 31 pages to explaining the form. Designed to be a shopping document, to allow borrowers to be able to select the very best loan available to them.

Still, some borrowers end up confused, expecting a document that says “total estimated settlement charges” at the bottom will, well, provide an estimate of total settlement charges.

But, because of what’s included—and omitted—from the three-page form, the amount shown on the bottom line is often significantly different from what the customer will actually have to pay to close the transaction. For example, in the San Francisco Bay Area, the “transfer taxes” that are due when property changes hands are typically paid by sellers. But they must be reflected on the GFE form, and can amount to thousands of dollars, prompting some borrowers to assume the amount shown on the form is one they must pay.

When Warner de Gooijer applied for a loan to buy a home in San Jose recently, he was confounded by the huge dollar figure looming at the bottom of the good faith estimate, which must be provided to borrowers within three business days of when they apply for a mortgage. Then his loan officer explained that he wouldn’t actually have to pay the amount shown at the bottom of the good faith estimate. “But do I trust my loan officer or the paper I’m signing?” said de Gooijer, who nervously wondered whether he’d be liable for the large amount anyway.

The overhauled GFE is intended to help borrowers compare loans and costs for loans. The real question for borrowers is to know what they can expect to write a check for at the closing table. The new GFE does not have any place that captures that.

The change is prompting some lenders to develop new worksheets of their own, so they can show the customer what he or she might really have to fork over at closing.

Hendricks Appraisal Services located in San Antonio, Texas is here to help you in whatever way we can within our means. Serving Bexar, Comal, Guadalupe, Wilson, Atascosa, Medina, Bandera and Kendall Counties since 1993. Please give us a call and one of our friendly and knowledgeable staff will assist you immediately.

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