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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 to need.

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 apart.

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."

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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," she says.

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 estimate.

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," she says.

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 estimates.

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."


-- Posted: March 15, 2004
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