No more surprises at closing?
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
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
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
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