Feds propose overhaul of mortgage process
Another check on bait-and-switch is a proposal to make it easier to compare the final statement of closing costs (the HUD-1)
to the good faith estimate. Under this proposal, certain lines and boxes on the HUD-1 would be labeled as corresponding to their counterparts
on the GFE.
On top of that, the proposal calls for lenders to stop itemizing junk fees such as "document processing." After all, what
does a mortgage originator do besides process documents? Instead, all of the lender's fees would have to be included in one line item, called
"Our service charge."
The most unusual part of HUD's proposal is the "closing script," which would be read aloud and, in HUD's words, "would
compare the loan terms and settlement charges estimated on the GFE with those on the HUD-1" and describe the loan in detail.
Key information still needed
These proposed changes concentrate heavily on disclosing fees and making sure that the estimated costs are accurate. There's less emphasis
on making sure that borrowers understand how high the payments can rise on adjustable-rate mortgages. That information is there, on the front
page of the good faith estimate, but it's in the middle of a text box and doesn't stand out.
"This is the critical piece of information," says Susan Wachter, professor of real estate at the Wharton School of Business
and a former assistant secretary of HUD for policy development. "Ask not only what the mortgage payment is today, but ask what it is in the
future -- three years, five years, 10 years."
The proposed GFE omits a couple of key pieces of information: the loan-to-value ratio (the loan amount as a percentage of
the home's value), and the monthly payments as a percentage of the borrower's income.
Alex Pollock, a fellow at the American Enterprise Institute think tank, has tried to interest lawmakers in a one-page
mortgage summary that would strongly emphasize the amount of the house payment as a percentage of income.
"The fundamental idea is really simple," he says. "People should, in a clear and straightforward way, understand what a
mortgage means to them. They ought to be able to take a risk if they want to, but they ought to be able to understand the risk they're
taking. We're not trying to tell people everything -- just what's relevant."
HUD will accept
comments on the proposal until May 13. After that, the agency will either make changes and formulate a final rule, or abandon the reform
proposal, as has been the case in the past.