No more surprises at closing?
By Holden Lewis • Bankrate.com

Imagine getting a simple document when you apply for a mortgage that would guarantee how much cash you would need at closing, your interest rate and the amount of the monthly payments. It would allow you to comparison-shop with ease.

That doesn't describe the mortgage process today. When you apply for a mortgage, you fill out and receive a slender tree's worth of paper, with documents that confuse more than enlighten. The mortgage industry wants to simplify that paperwork.

"The mortgage lending process is anything but consumer-friendly, based upon the confusing terms and conditions and myriad paperwork that consumers are given these days," says John Courson, chairman elect of the Mortgage Bankers Association.

Trouble is, a lot of that paperwork is mandated by federal laws and regulations that protect consumers. Mortgage bankers and brokers want the federal government to amend the rules -- a difficult, even perilous job, like fixing the engine while the car is tooling down the highway.

In good faith?
The mortgage industry, consumer groups and the federal Department of Housing and Urban Development worked on mortgage reform in the late 1990s, but little came of it because "the groups could not see eye-to-eye on a new framework," says Joe Falk, president of the National Association of Mortgage Brokers. Now the industry is pushing mortgage reform again.

All sides concur that reform should focus on revamping one document: the good faith estimate. If you have ever applied for a mortgage, you probably agree.

The good faith estimate itemizes the closing costs -- everything from originating, underwriting and wire transfer fees to pest inspections. By federal law, the broker or lender has to prepare it within three days of your application.

The good faith estimate is confusing, especially to a first-time borrower, such as Tim Avera of Macon, Ga. He closed on his house on the last day of 2001. Most of the loan documents made sense to him, but he had to ask for explanations of a couple of fees. He was impressed by the number of line items.

"You have all these things like the title search, lawyer fee, points -- just about every little thing," Avera says. "You see the $15 fees for things like flood insurance, little things that add up."

In addition to being confusing, the good faith estimate has no teeth. It's not legally binding. It might estimate that a borrower will need $3,000 at closing when the borrower will really need $5,000, and the borrower has no legal recourse.

Avera's good faith estimate listed a $500 attorney fee. At closing, he inspected the final loan documents and noticed that the attorney fee had been raised to $600. He squawked, and the fee was reduced to $500. But the title agency didn't have to reduce the fee. Avera could have been forced to pay the extra $100 or walk away from the deal.

Mortgage bankers and brokers suggest two major changes:

• radically simplify the good faith estimate form by eliminating most of the line items, and
• make the good faith estimate legally binding, but with some wiggle room.

"Consumers want to know, 'What's my interest rate, how much cash will I need at closing, and what will my monthly payments be?'" Courson says. "They should get this information in a simple piece of paper that would include the guaranteed closing costs."

Comparison shopping
Streamlining the good faith estimate would require major changes in the Real Estate Settlement Procedures Act, the consumer-protection law that mandates what must be disclosed in the good faith estimate. That law makes it illegal for mortgage service providers to accept kickbacks or collect unearned fees.

RESPA lets borrowers know exactly where their money is going by requiring line items, such as document preparation fees, warehouse fees, courier fees, underwriting expenses and origination and discount fees. In theory, a borrower can take the good faith estimate as a guide to shop around for services. For example, a borrower might call title agencies to find one that will beat the settlement fee quoted on the good faith estimate.

In practice, hardly anyone does that, Falk says. "Comparison-shopping works if the disclosures are simple and easy to compare, which is not the case today," he says. He adds that many lenders discourage shopping, anyway: "Few lenders will allow a consumer to select their own appraisal company. If no one is shopping for these settlement providers, then what is the purpose of itemization?"

The bankers and brokers say they have a better idea: Eliminate most of the line items required by RESPA and let originators quote a bottom-line fee. In exchange, brokers and lenders would be allowed to engage in business practices that are now banned under RESPA.

For example, a lender can't charge you a penalty fee for choosing a title agency that it doesn't want you to use. A mortgage broker can't accept new computers in exchange for exclusively using one credit bureau. Lenders and brokers say they could work more efficiently if they could engage in these sorts of practices, and that they would pass the savings on to borrowers.

Take a guess
Skeptics might suggest that stripping away RESPA's consumer protections wouldn't save borrowers' money. Such a proposal, by itself, wouldn't fly in Congress. To which mortgage lenders and brokers reply: OK, rewrite the law to require us to stick to the bottom line of our good faith estimate.

Anyone who has been unpleasantly surprised at the closing table -- socked with a $5,000 bill when the good faith estimate said $3,000 -- would welcome such a guarantee. It would work this way: The lender would quote total closing costs in the good faith estimate, and actual costs could not exceed that (except by a modest amount -- maybe 10 percent).

Let's say someone borrowing $150,000 gets a good faith estimate guaranteeing that closing costs will be 2 percent of the loan amount, or $3,000 (give or take 10 percent). If the lender runs into problems and closing costs will exceed $3,300, the lender would have to come up with a revised good faith estimate well before closing day.

Avera thinks that would be a good idea: "I really think it would be better because you almost go into closing as a guessing game," he says. "You're guessing how much it will be."