Michael Creed's Blog

As you probably know, getting a mortgage can be confusing and frustrating than ever – particularly if your loan officer or mortgage broker is less than forthright with the terms of the loan.  To fix this, the U.S. Department of Housing and Urban Development (HUD) has proposed a major overhaul of the entire mortgage lending process; from application to closing.

The proposed changes to the regulations are designed to accomplish a number of different things:

• Make comparing mortgage offers easier while shopping for a home loan

• Force lenders and brokers to more accurately estimate the closing costs by limiting the percentage of change from the initial disclosure to the final numbers brought to the closing table

• Ensure that borrowers know all the terms of their loan

Here is a list of some of the biggest changes that have been proposed:

After providing basic information to the broker or loan officer, the applicant would receive a four-page Good Faith Estimate(click the link to see the new format) of closing costs. The first page would give a standardized summary of costs. The next three pages would provide details about the fees and tips on how to compare loan offers.

The good faith estimate, or GFE, would have to be somewhat accurate. The total charges couldn't exceed the estimated total by more than 10 percent.

The trade-off between interest rates and lender's fees would be clearer: A "no closing cost" mortgage has a higher rate than a home loan in which the borrower pays fees out of pocket.

A broker's compensation from the lender, in the form of yield-spread premiums, would have to be disclosed.

It would be easier to compare the numbers on the good faith estimate with the numbers on the final HUD statement of fees. The HUD is the final statement of mortgage-related fees that the borrower gets at closing along with all the seller's fees if it is a purchase transaction. Right now, the GFE and HUD don't have to look alike, making it difficult to compare them side-by-side to see how the fees changed between application and closing.

Someone would have to read aloud a "closing script" that accurately summarizes the loan package and the settlement charges. Any inconsistencies between the rate and fees described in the GFE and the final rate and fees would have to be pointed out.

Many homebuilders have "affiliated business arrangements" with mortgage lenders and title companies. The builders tell homebuyers something like this: "If you don't use our approved mortgage company, you'll have to make a bigger earnest-money deposit, and you won't get a $2,000 'closing incentive.'" The proposed regulation seeks to ban that much-complained-about practice. (this is my personal favorite!)

This is the second time that the Bush administration has tried to change the regulations that apply to mortgages under the Real Estate Settlement Procedures Act. The Clinton administration tried more than once, too. Each effort died after drawing opposition from lenders, brokers and title insurers. Those industry players have given this latest proposal a warmer reception. They had more input this time.

Next week, I will continue this discussion by asking the question, "Is simpler better?" and I will also comment on accuracy & why it matters as well as discuss what the critics have to say about this proposal.  Of course, I will also tie it all together with some final thought-bits.  Stay tuned!