When good faith
estimates go bad
You can't blame Martha Gonzalez for feeling nervous.
As she prepares to close on a mortgage for the second time in her
life, she worries about a replay of the first.
The day before closing on her first house five years
ago, "I got a call that my numbers were wrong," she says.
The title company informed her that she would have
to go to closing with $2,500 more than she and her husband had expected
The Gonzalezes were bitten by an inaccurate good
faith estimate. It happens to thousands of people every year, and
the victims have no recourse. Either they pay up or the deal falls
For the Gonzalezes, excitement over buying that first
house yielded to panic. They had scraped together every last bit
of savings for the down payment on the newly built house in Miami.
They didn't have a spare $2,500.
"You try to scrounge up every relative
you have and say, 'Can we borrow?'" Gonzalez says. "To
be hit with news like that was, like, wow."
Federal regulations require brokers and lenders to
provide a good faith estimate of closing costs, but there is no
penalty for inaccuracy. Lenders and brokers can provide a low estimate,
then spring an expensive surprise in the final hours without getting
into trouble with the feds.
U.S. housing secretary Mel Martinez calls it "settlement
sticker shock." He has proposed making the good faith estimate
binding, but has met resistance from the title industry and its
allies in Congress.
"Today, this estimate is more like a good
faith guesstimate," Martinez told a House committee last year.
Because the government won't protect you from an
inaccurate good faith estimate, you have to watch out for yourself.
You have to review the estimate critically and ask questions. That's
what Gonzalez has been doing as she prepares to buy a house for
the second time.
"My whole fear is the day before closing
I'm going to get this whopper where my good faith estimate is incorrect,"
To prevent an unpleasant surprise, she keeps
in regular contact with the title agent, who is the first to know
when the real fees differ from the fees listed on the good faith
All fees are subject to change between the good faith
estimate and the closing table. Hazard insurance premiums and government
fees such as property taxes are among the most likely to be inaccurate
in the good faith estimate. You can always talk to the insurance
agent yourself to find out how much the insurance will really cost,
and you can visit the county courthouse to learn how much the property
taxes will be.
In Gonzalez's case, the $2,500 error involved property
taxes. The good faith estimate listed the property tax for an empty
lot, without a house. Looking back, Gonzalez wonders why no one
caught the error earlier. When drawing up the estimate, was the
lender dishonest or incompetent?
"I think it might have been a little bit of both,"
Either way, there was nothing she could do about
it but grit her teeth and find the extra $2,500.
The good faith estimate is required under a law called
the Real Estate Settlement Procedures Act. The law also bars kickbacks
among settlement providers and prohibits the property seller from
requiring the buyer to use a particular title insurance company.
Those elements of the law are enforced. But the law doesn't establish
an enforcement mechanism for ensuring the accuracy of good faith
Martinez, the secretary of the Department of Housing
and Urban Development, has proposed a new set of regulations governing
closing costs, explaining to Congress: "It isn't right that
far too many Americans sit down at the settlement table only to
discover unexpected fees that can add hundreds, if not thousands
of dollars to the cost of their loan."
Under HUD's proposal, lenders either would have to
abide by their good faith estimates (with a bit of wiggle room on
some of the itemized fees), or they could dispense with the good
faith estimate altogether and give borrowers a binding, bottom-line
closing cost, without having to itemize fees. Lenders using the
latter method would be exempt from the law's anti-kickback provisions.
Martinez estimates that the proposal, if put into
effect, would reduce closing costs by an average of $700 on each
loan. The biggest winners would be borrowers and large banks. The
losers would be mortgage brokers and small title agencies, which
are fighting to dilute or kill the proposed changes.
One of the nation's biggest mortgage lenders, ABN
AMRO, guarantees a bottom-line price for closing costs. The Guaranteed
OneFee program lumps all of the lender's fees and most third-party
fees into one price, which the company won't increase after the
borrower locks in an interest rate. OneFee excludes property taxes
and hazard insurance though, so borrowers still have to make sure
those are estimated accurately.
"Customers have embraced it," ABN
AMRO Mortgage vice president William Newman says, although "it's
a challenge to explain it."