New Good Faith Estimate and HUD 1 Form Approved

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HUD has announced a new Federal Good Faith Estimate and HUD 1 form. The regulations have been finalized, but as I write this, they have not yet been published, at least in their final form. They appear much superior to the current forms, but I have a major gripe in that the new forms will not be required until January 1, 2010. There is no reason on this planet why they can't be enacted effective at the beginning of 2009 at the latest.

I haven't exactly made a secret of my disgust for the loose loan disclosure rules we have had for these many years, and these loose requirements were a major cause of the meltdown we currently find ourselves in. I've been griping about the loopholes in the Good Faith Estimate from my very first articles on the site. I said a year ago in How to Avoid A Repeat of the Housing Market Mess, if I had to pick one place to prevent a repeat of this whole mess, it would be in the loan disclosure requirements. Without a copy of the regulations, I can't confirm how well they've done, but the new form appears to be light-years ahead of the previous version.

You can view the document here. Go ahead and click on it - it should open in a new window or tab. You're going to want to be referring to this while viewing it.

The "Summary of Your Loan" box on page 1: All of those questions are wonderful to see where they are highlighted, not hidden in the middle of other stuff or altogether missing:

Your initial loan amount is

Your loan term is

Your initial interest rate is

Your initial monthly amount owed for principal, interest, and any mortgage insurance is

Can your interest rate rise?

Even if you make payments on time, can your loan balance rise?

Even if you make payments on time, can your monthly amount owed for principal, interest, and any mortgage insurance rise?

Does your loan have a prepayment penalty?

Does your loan have a balloon payment?

On Page 2, it explicitly tells the consumer what they are paying in origination versus discount (often incorrectly used on the previous form), whether they are getting anything back, or what they are paying (discount) in order to get this loan rate.

1. Our origination charge This charge is for getting this loan for you.

2. Your credit or charge (points) for the specific interest rate chosen

The credit or charge for the interest rate of % is included in

"Our origination charge." (See item 1 above.)

You receive a credit of $ for this interest rate of %.

This credit reduces your settlement charges.

You pay a charge of $ for this interest rate of %.

This charge (points) increases your total settlement charges.

The tradeoff table on page 3 shows that you can change your total settlement charges by choosing a different interest rate for this loan.

Now here's another change I approve of: Lumping the fees into categories, rather than playing hide the salami by pretending charges do not exist, or they don't fit exactly on a given line:

3. Required services that we select

These charges are for services we require to complete your settlement.

We will choose the providers of these services.

Service Charge

4. Title services and lender's title insurance

This charge includes the services of a title or settlement agent, for example, and title insurance to protect the lender, if required.

5. Owner's title insurance

You may purchase an owner's title insurance policy to protect your interest in the property.

6. Required services that you can shop for

These charges are for other services that are required to complete your settlement. We can identify providers of these services or you can shop for them yourself. Our estimates for providing these services are below.

Service Charge

7. Government recording charges

These charges are for state and local fees to record your loan and title documents.

8. Transfer taxes

These charges are for state and local fees on mortgages and home sales.

9. Initial deposit for your escrow account

This charge is held in an escrow account to pay future recurring charges on your property and includes all property taxes, all insurance, and other .

10. Daily interest charges
This charge is for the daily interest on your loan from the day of your settlement until the first day of the next month or the first day of your normal mortgage payment cycle. This amount is $ per day
for days (if your settlement is ).

11. Homeowner's insurance
This charge is for the insurance you must buy for the property to protect from a loss, such as fire.
Policy Charge

B Your Charges for All Other Settlement Services $

Then on page three, it breaks the charges into three groups, the first group being charges that are not allowed to change

These charges cannot increase at settlement:

Our origination charge

Your credit or charge (points) for the specific interest rate chosen (after
you lock in your interest rate)

Your adjusted origination charges (after you lock in your interest rate)

Transfer taxes

The total of these charges can increase up to 10% at settlement:

Required services that we select

Title services and lender's title insurance (if we select them or you use companies we identify)

Owner's title insurance (if you use companies we identify)

Required services that you can shop for (if you use companies we identify)

Government recording charges

I'd rather title and escrow charges be in the first category (cannot increase), but I'll take what I can get. This forces actual price sensitivity upon loan officers, although there is still room to lowball. It also limits title and escrow junk fees to an amount you agreed to pay in the first place, plus 10% at most. Once again, the actual regulations, once they are available in final form may short-circuit the usefulness of all of this, but taking things on the face of it, this is a HUGE amount of improvement.

Finally, the list of things that can change prospectively without limit:

These charges can change at settlement:

Required services that you can shop for (if you do not use companies we identify)

Title services and lender's title insurance (if you do not use companies we identify)

Owner's title insurance (if you do not use companies we identify)

Initial deposit for your escrow account

Daily interest charges

Homeowner's insurance

I do not understand why daily interest charges are in this list, unless they are merely in the sense of the number of days you are being charged interest for changes. The actual per day charge should be known exactly as soon as you have a loan amount and interest rate, but the number of days prepaid interest will vary with the actual settlement date. Since the calculation is in the form of $x per day times y days = $z, no matter how many decimal places you're correct on the $x per day figure, if the number of days (y) changes as settlement gets moved forward or pushed back, it doesn't take a genius to figure out that the figure for $z is going to change.

The next item is as beautiful to my eyes as any work of art. I've been harping about the tradeoff between rate and cost since day one on this site, and quite a while before that, but it just does not enter the public consciousness. The federal government has built this tradeoff right into page 3 of the good faith estimate!

Using the tradeoff table

This GFE estimates your settlement charges. At your settlement, you will receive a HUD-1, a form that lists your actual costs. Compare the charges on the HUD-1 with the charges on this GFE. Charges can change if you select your own provider and do not use the companies we identify. (See below for details.)

Understanding which charges can change at settlement

In this GFE, we offered you this loan with a particular interest rate and estimated settlement charges. However:

If you want to choose this same loan with lower settlement charges, then you will have a higher interest rate.

If you want to choose this same loan with a lower interest rate, then you will have higher settlement charges.

If you would like to choose an available option, you must ask us for a new GFE.

Loan originators have the option to complete this table. Please ask for additional information if the table is not completed.

Your initial loan amount

Your initial interest rate1

Your initial monthly amount owed

Change in the monthly amount owed from this GFE

Change in the amount you will pay at settlement with this interest rate

How much your total estimated settlement charges will be

The loan in this GFE

You will pay $ less every month

Your settlement charges will increase by $

You will pay $ more every month

Your settlement charges will be reduced by $

For an adjustable rate loan, the comparisons above are for the initial interest rate before adjustments are made.

Cost is attached to rate and rate is attached to cost. You cannot separate one from the other, but you would not believe how many people just assume that they can have the lowest possible rate without points or fees, and have been taken for a ride because they did not understand this fundamental truth of mortgage loans.

The new HUD 1 form is a little more readable, and links back better to the Good Faith Estimate, both praiseworthy endeavors. It's essentially the same format on the first two pages, with a third page added, linking back to the settlement charge categories on the Good Faith Estimate. I've always been a big fan of the HUD 1 form, and all they appear to have done is add more information with a third page that links back to the good faith estimate in an easily understandable way.

National Association of Mortgage Brokers (NAMB) issued a press release

NAMB will be issuing a press release announcing its disappointment with the final RESPA rule once it is released. NAMB believes that the final rule will hinder competition in the market and increase costs to consumers.

In addition, NAMB will be calling upon Congress to take immediate action to review the rule.

I wasn't involved in the process, so I have no idea if NAMB wanted a better, tighter standard or a looser one. I'm willing to be charitable, but the new form is so much better for consumers than the old one that I have my doubts as to whether NAMB, as well as the Mortgage Bankers Association (their statement is here, leading me to suspect that they got a little more of what they wanted). I don't know if they were pushing for even more transparency or less, but change would have come decades ago if the industry wasn't so dead set against it.

May I observe that this is not a done deal yet. Congress, in particular the financial committee chairmen (Barney Frank in the House and Chris Dodd in the Senate), are well known to be completely in the pocket of the industry (fee simple title, at that - and owned free and clear). I have no idea of the political maneuvering that went into this - I have no idea whether the Bush Administration is intentionally going to the mat on this one, or if it's simply career bureaucrats finally beginning to do the job they should have done thirty years ago. Given the President's history on trying to prevent the meltdown (he and Congressional Republicans tried no less than three times to prevent or lessen the mortgage meltdown, and were stymied by the Democrats in every case), I'm inclined to be believe the Bush Administration is at least complicit in the changes, although I have no direct evidence. But I suspect that any changes Congress makes if it gets involved will not be for the betterment of the consumer. In fact, I suspect the industry is behind the delay in implementation (over an entire year) to give them a chance to work the changes in Congress (where bribes campaign contributions are legal) that they couldn't get from the career bureaucrats.

To summarize, all I'm working from here is the fact sheet and the new forms. The Devil is Always in the Details, and the finalized regulations are not yet available for public viewing as of this writing. They could be so loose that the improvements in the new forms lose all meaning and importance - for example, the current regulations and the current form, which if the regulations were what they needed to be, the current form would not be the joke it is. But if these changes can be taken at face value, the new forms will be the best thing for mortgage consumers ever. I'm not saying they can't be improved. I'm just saying that I would not have expected anything nearly so good for consumers as these appear to be to have come out of the government bureaucracy.

Caveat Emptor

(Thanks to Steve Kaye for bringing this to my attention!)


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I am a real estate attorney in NC, so you know my perspective.

From a practical standpoint I do not see how the lenders/mortgage brokers will function with the new GFE/HUD. They will be quoting fees for many matters that typically are shopped for, such as homeowners, wind & hail, and flood insurance. The costs for those change all the time, and vary depending on the type construction, distance fire hydrants/fire stations, and many other factors I am not conversant with.

Even recording fees, since they vary by the number of pages, will be tough to guess, because some lenders use a 15 page deed of trust, while others use one that is only 9. So the mortgage broker must decide at loan application which correspondant lender they will sell the loan to, and see which form DT they use?

Title insurance varies depending on whether or not a prior policy exists/can be found, so the borrower gets a reissue rate or not. The reissue rate can vary depending on amount of the coverage and the age of the prior policy. So do they always quote a full premium?

The daily interest rate is a problem becuase it varies depending on what day you close, and, specially these days, actual closing dates are rarely the initially targetted date. The per day amount should not change at all, but the total should not be fixed. So will the lender quote 30 days on every GFE?

Closing costs vary based on a wide range of factors. If the borrower decides to keep a second mortgage when they refinance, there are doc prep, execution coordination costs for the holder of the loan being subordinated, and addtional recording fees. If the borrower decides to, or cannot because of rescheduling or other reasons, come to closing, and it turns into a mail-away, just the overnight fees push you over the 10% limit. If the borrower decides to, or cannot because of rescheduling or other reasons, come to closing, and wants to close by power-of-attorney, there are fees to prepare the POA, get it approved and recorded. If the property is in another county, there are additional costs to compensate for the travel time and costs. Etc., Etc.

Is some poor lender/mortage broker going to try and get lists that accurately describe how fees can change, and flow chart them for every service every time someone comes to them for a loan quote?? Or will they tell all providers on their lists to quote HIGH, assume the worst/most expensive situation? Then won't that be what the consumer expects, so will be satified with?

I could go on, but you get the point.

It appears to me that whoever put this new plan in place has no experience with how the actual process occurs in the real world, not any idea how to really educate and protect consumers.

Oh, what about disclosure of SRPs and YSPs? Knowing them goes a long way to fill ot the true picture of what the borrower and lender are getting. I see no mention of them in the new GFE/HUD.

Dan Melson Author Profile Page said:

I agree that SRP and YSP need to be disclosed, along with secondary market premium for direct lenders, even though they are not paying them, just so the concept of TANSTAFL doesn't get lost, as it has for a long time.

HUD is making the choice that they would rather have lenders quote high and deliver lower (if they can). Whereas I certainly see the problems that's going to cause, I prefer it to the current status as well. Developments in the loan market will favor those who quote as accurately as possible, rather than who provides the most shameless lowball quote. Quite often, I tell people that there's nothing I can do that's worth the cost of doing it - but then these same people go out and get second opinions because they don't want to believe me, and they end up signing on the dotted line for a loan that costs more in closing costs than it is worth, and then they come back to me trying to get out of it and I tell them exactly what I told them in the first place, but they're still stuck with the new loan.

Bob Willett said:

OK, so now that the new Good Faith Estimate (GFE) is "in use" those damn lenders are going to have to give us accurate estimates, right? Well… er… no. According to several video conferences and teleconferences I have been in on, you can expect that most mortgage companies will NOT be giving out any GFEs until well into the process.

Why, because the liability is too great. I know that it's frustrating for consumers out there to get an estimate, and then have the fees be very different. Unfortunately sometimes that does happen - especially if the initial GFE was given before the property was selected. (See my Blog: The fact of the matter is the lender is usually only charging one to three of the costs itemized on the GFE, they are collecting a few more fees that will be paid to other parties, and the rest are charged-by and paid-to someone that the lender has no control over. The new GFE requires us to GURANTTE many of these fees, and be accurate on others within 10%. This is about like the car dealer being required to guarantee what your care insurance will cost - without being able to see your driver's record! The simple fact is WE DON"T KNOW what a lot of these fees will be. (Here in Sacramento, for instance, many of our transactions require us to use escrow companies located Southern California' it's not unusual for these companies to be as much a $2,000 higher than what local companies would charge for the same services.) The end result of this requirement is that no lender in their right mind will ever issue a GFE until they have a copy of the fully-executed contract, a complete application including a credit report, and have the escrow companies' costs breakdown.

The other thing that I have not seen mentioned anywhere is that fact that the new form DOES NOT ALLOW US TO TELL THE BORROWER WHAT THEIR COSTS WILL BE. For some unexplainable reason we have to now itemize ALL closing costs regardless of whether or not they are to be paid by the seller or the buyer. There is no place on the form that tells the buyer which fees are which, what their total cash-to-close will be, or what their payment will be. Oh, and since there is no place to sign the form, there is no way to know just when a borrower received and/or looked at the form.

I have always taken a great deal of pride in my ability to do a very accurate GFE, and to explain to my borrowers just which fees can change and why. Later if we find out that: the seller will require the buyer to pay fees normally paid by the seller, or we have an out-of-area escrow company, or that the property is in a flood zone, or that we need a 2nd appraisal, a septic inspection, a well inspection, a pool inspection, a structural pest inspection, a foundation inspection, a re-inspection for work required, etc., etc., etc., I simply re-do the GFE. But the new regulations don't allow me to do that because most of these things do not constitute a "change of circumstances" according to HUD.

The really frustrating thing to me is that this will only make the situation worse. Unfortunately many lenders have adopted more of a bait-and-switch business model. They are not going to change; they are going to take the same unethical and dishonest approach that they always have. Crooks are crooks. In the mid 1990s our state changed the laws to allow the same people that run pay-day loan and check cashing companies to do mortgage loans; the result was just about everybody with a pulse could get into the mortgage business - including people on probation for felonies! Do you really think these people are going to follow the rules? Of course not.

It's really going to interesting to see just what happens. My prediction is that this new disclosure law will undergo a major overhaul in about 6 months when the consumer complaints begin to mount. In the mean time legitimate lender will be severely restricted in their ability to assist borrowers because they are trying their best to follow the rules without going broke. The crooks will use the new requirements to totally baffle and confuse borrowers - pretty-much just as they have always done. They'll just have a much better tool to do so.

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This page contains a single entry by Dan Melson published on November 13, 2008 7:00 AM.

Understanding Loans: When There Is A Problem, It's Good If They Tell You Right Away was the previous entry in this blog.

Housing Bubble Death Trap is the next entry in this blog.

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