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Feds propose overhaul of mortgage process

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Is simpler better?
For consumers, the most visible change would be on the top page of the good faith estimate. The proposed document is less cluttered than today's good faith estimates, which have dozens of line items and look like something cooked up by a misanthropic accountant. The top page of the revised good faith estimate would summarize the costs in two categories:

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1. Those charged directly by the lender.

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

Summarizing the costs this way could confuse consumers and make it harder to compare offers because some of these charges vary, depending on the date of closing. One lender could offer a better deal, based on closing the loan on the fifth of the month, and another lender could offer an inferior deal based on closing on the 25th of the month, and the latter deal would appear look less expensive because less money would be set aside to pay for property taxes and homeowner insurance.

The Department of Housing and Urban Development, or HUD, says the proposed good faith estimate lumps all the third-party fees and taxes together to keep things simple and to "reduce any incentive for loan originators and others to establish myriad 'junk fees' and provide them in a long list in order to increase their profits." In this case, it might be helpful to introduce some complexity by separating recurring expenses from one-time fees and taxes.

Accuracy counts
Under the proposal, lenders would have to give accurate estimates. Once the rate is locked, the lender would not be allowed to increase its service charge "absent unforeseeable circumstances." Government recording and transfer charges would have to be spot-on, too.

All third-party charges, combined, would not be allowed to rise more than 10 percent from the good faith estimate. For example, if the title insurance, appraisal, credit report and survey total $3,000 in the GFE, that total could not exceed $3,300 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.

The pitfalls are plentiful, says Jeff Jurin, national sales manager for First Title & Escrow, of Rockville, Md. "The broker in Rockville, Md., has no idea there's a city tax in Miami, Fla., so it doesn't get in the (GFE) calculation," Jurin says.

First Title & Escrow supplies lenders with detailed closing costs nationwide. The company stands to gain if the feds require the good faith estimate to be accurate, and Jurin and his colleagues have been tracking reform efforts for years.

Jurin believes that the accuracy requirement is the most far-reaching part of the reform package. "I think it's going to stop a lot of bait-and-switch and table shock," he says.

What critics say
On the other side, Howard Lax, a real estate attorney in Michigan who writes a widely read newsletter called The Mortgage News, writes in a comment submitted to HUD: "The idea of tolerances as proposed by HUD is a terrible policy decision." Lenders should be accountable for the accuracy of their own fees, and not for anyone else's. In the worst case, Lax writes, "If the final costs and fees are not within tolerances, the closing agent is not going to close, and the buyer of a home is going to lose his earnest money deposit."

Next: All of the lender's fees would have to be included in one line item.
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