Michael Creed's Blog

This is the third and final post regarding the new GFE that has been proposed by the U.S. Department of Housing and Urban Development (HUD). In the first week (4/4/2008), I wrote about the proposed changes & what they are intended to accomplish. In the second week (4/11/2008), I asked, "Is simple better?" and suggested that accuracy is imperative with this new proposal.  This week I will tell you what the critics have to say, suggest that key information is still needed and also tell you how you can take action by submitting your personal comments directly to HUD.

What are the Critics Saying?

Those that oppose this do so with valid points.  The most resounding critical concern is that the proposal by HUD regarding tolerances for fees other than the lender fees is simply absurd.  It's argued that Lenders should be held to the accuracy of their own fees but not to the accuracy of the fees of others.  Ultimately, as a worst case scenario, if the final costs on the closing statement are not within the tolerance levels that have been proposed - even if the lender fees haven't changed at all - the closing agent will not be able to close the loan and the buyer of the home would then lose his/her earnest money deposit. 

If you would like to read a detailed rebuttal to this proposal, click here to read a public comment submitted to HUD by Howard Lax, a Real Estate Attorney from Michigan who writes a frequently read newsletter entitled, "The Mortgage News."

What Information is Still Needed?

All of the proposed changes are focusing heavily on the disclosure of fees and making sure that the estimated costs are accurate.  There is very little attention given to making sure that borrowers understand how high their payments can rise on adjustable-rate mortgages.  This information is on the new form, but it doesn't stand out at all; in fact, it's buried in a text box on the first page.  Based on the turmoil in today's market, one would think that this is very important and should be highlighted and highlighted again!  Borrowers need to realize that the payment today may not necessarily be the payment in 3, 5, or 10 years and, unfortunately, that not all loan officers are going to be quick to point out these future changes.

The proposed GFE also leaves out a few things that are important to any real estate transaction: the ratio between the loan amount and the value of the home (also know as Loan-to-Value Ratio or LTV) and the monthly payments as a percentage of the borrower's monthly gross income (also know and Debt-to-Income Ratio or DTI).  The idea of adding this information is simple, they are two data-points that would help you - the borrower - understand & evaluate what risk you are taking if the value of your home falls and also what risk you are taking as a percentage of your income.  You can bet that I, as a lender, sure look at those numbers before approving a loan!! To take this one step further, who do you think knows the most about your financial situation/capabilities - you or a lender?

Please Take Action

HUD will be accepting comments on this through May, 13th 2008. 

NOTE: When you click on the link for commenting, you will be brought to the main docket for this proposal (Docket ID HUD-2008-0028); to enter a comment, scroll to the bottom of the page and enter in the required information and your comments. 

Please consider adding your comments as that is the entire purpose of HUD's open forum on this topic.

Thank you for reading; if you liked this three-week series, please post your comments below.

That comment, in and of itself, doesn't seem so "out of the box" anymore, but the premise holds true today more than ever.  With the current shape of the housing market, you and I as home sellers and/or Realtors^® must think way-outside the box.  Take a look at what Bob Fanning of western Wisconsin did to induce the sale of his home:

By Pam Louwagie - Minneapolis Star Tribune - chicagotribune.com

8:35 AM CDT, April 4, 2008

MINNEAPOLIS

Whoever buys Bob Fanning's house will hope he dies. And Fanning is fine with that.

Trying to separate his 5,600 square-foot western Wisconsin home from others in the real estate glut, Fanning, 69, has come up with an odd incentive: The buyer will be named beneficiary to a 10-year, $500,000 term life insurance policy. If Fanning dies in that time, the purchase price of the Whitehall, Wis., home — listed at $498,900 — is covered.

"He's an outside-the-box thinker, no question about it," said his Realtor, Wayne Peters.

Most younger sellers couldn't plausibly use such a sales tactic, Peters said, but when someone is 69 "the odds are getting to the point where people realize that there's a significant chance that they could collect."

Fanning, who said he has taken his share of risks as a businessman, said he thinks it's a great deal.

It would be voided if there are any shenanigans, though.

"The policy says he can't commit suicide, nor can they knock him off," Peters said. "The attorneys have provided for that."

But isn't Fanning afraid of any, er, "unfortunate accidents"?

"I had maybe a 10-second thought about that when we signed the policy," Fanning said. "I'm pretty low profile to begin with."

His wife, Janus, said she is supportive of his entrepreneurial thinking. "I'm always in awe of how he comes up with a different way of doing things," she said. "It's a perk for the house."

As for the odds: Fanning said he has no health problems, though he joked that he's "too short" for his weight. Both his parents died before age 79, as did a sister.

He said he'd be willing to disclose medical records to a buyer.

Without being specific, Fanning said he paid a hefty price for the insurance policy "because actuary tables show I might not reach 79, so I think it's a hell of an incentive to buy a home."

In Fanning's mind, it's not taboo to put a price on his head, as well as on his house.

"When you get to this age," he said, "death is something you have to start to deal with."

It's this kind of thinking outside the box that will entice a wavering homebuyer in a minute! Way to go Mr. Fanning! 

For the majority of us - who may not be to the age where an incentive like this actually has any value - we need to sit back and think creatively about what we can do to sell our homes in market that is more saturated today (with stock) than it ever has been in recent history!  Happy Selling!

In last week's posting, I commented on the Fed's proposed Good Faith Estimate (GFE) overhaul and how that will help you - the borrower - more clearly discern between the loan options you have in front of you.  To read that article, click here.

This week, I will tackle the question, "Is simple better?" and I will also discuss the importance under this new proposal of being accurate.  Read on.

Is Simple Better?

As you may have noticed if you reviewed the new proposed four page GFE sample, the most visible change would be the top page of the new GFE.  The proposed document is cleaner and less cluttered than today's version, which has dozens of line items and resembles something cooked up with by a distrusted accountant. The tope page of the proposed GFE would summarize costs in two categories:

1. Those charged directly by the lender.

2. Those imposed by third parties such as credit bureaus, appraisers, title insurers, homeowner insurance companies, condo homeowner's associations, and the county recording office.

Some argue that summarizing the costs in this way could confuse you - the consumer - and make it harder to compare offers because some of these charges vary, depending on the date of closing.  They purport that one lender could offer a better deal, based on closing on the fourth day of the month while another lender could offer a lower quality (i.e. higher cost) deal based on closing on the last day of the month; the latter option would look more attractive because less money would be set aside to pay odd-days interest, property taxes and homeowners insurance. Personally, I think that you - the consumer - are smart enough to figure this out on your own; or at least with the help of your banker if numbers "aren't your thing!"

The Department of Housing and Urban Development (HUD) says that the new proposal lumps all the third party fees and taxes together so that things will be kept simple and to, reduce any incentive for loan originators and others to establish a myriad of 'junk fees' which are typically provided in a long list so as to increase the originator's profits.  In this case, I think it might be helpful to introduce some sort of complexity by separating those costs that are recurring (taxes, insurance, HOA fees, etc) and those that are one-time fees.

Accuracy is Imperative

Under the proposal, lenders would have to give accurate estimates; what a novel idea!?  (please accept my apology for the sarcasm as I feel that accuracy is necessary regardless of whether it's mandated by law). Once the rate is locked, the lender would not be allowed to increase its service charge barring unforeseeable circumstances. Government recording and transfer charges would have to be "on the money" as well.

All third-party charges, combined, would not be allowed to rise more than 10 percent - from the good faith estimate - on the final closing statement. For example, if the title insurance, appraisal, credit report and survey total $4,000 in the GFE, that total could not exceed $4,400 at closing.

The accuracy requirement will present a challenge to national lenders that underwrite loans far from their headquarters. They will need to be aware of local customs, such as which party -- the buyer or seller -- typically pays for the lender's title insurance, and they'll have to stay up to date on all government fees too. For instance, say a broker in Santa Clara, CA has no idea that there is a city tax in Miami, Fl.  When he/she sends out the initial GFE calculations, if they do not know what is going on, their GFE will be missing the tax.

Personally, I feel that if the national lender cannot actually keep track of this data, then he/she should step back and not be taking on more than he can handle.  If that means that national lenders have teams of bankers that specialize in certain states, then so be it. Many national lenders are balking at this change because of this concern.

I believe that this accuracy requirement is the most far-reaching part of the reform package and I think it's going to stop a lot of bait-and-switch / table shock that currently occurs; which is something this industry is in dire need of.

Last week I mentioned that I would also talk about what the critics have to say and also give some final comments on this whole thing but I have decided to hold off on that for another week because I would easily double the length of this posting from it's current size if I talked about it today. 

Most would agree that this would be too much to read in one sitting.  So, stay tuned for part three and a call to action next week!

Have a great day!

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!