In its efforts to eliminate settlement cost surprises for home mortgage applicants the federal government may have inadvertently opened the door to a new and potentially more costly set of problems for consumers.
Starting at the beginning of 2010, nationally mortgage lenders are now required to issue new "good faith estimates" to all mortgage applicants that includes a list all the possible loan fees and settlement charges for a mortgage.
The Department of Housing and Urban Development (HUD) developed these regulations and the estimates that lenders provide upfront to borrowers must be complete and accurate including all the fees that are later charged at the close of escrow.
The basic premise is that the "GFE" should eliminate some of the most controversial practices in home mortgages which include intentional and/or inadvertent underestimation of fees.
The "old" system had some lenders lowballing their estimates to entice applicants away from their other mortgage competitors and the effect was to blindside unknowing consumers with eleventh-hour, last minute surprises at closing. These "surprises" included fees that, at times, could add up to thousands of dollars higher than the original estimates provided by the lender.
Before there were no federal rules that would penalize lenders that provided lowball mortgage numbers and in turn left borrowers both shocked and stunned because they had to pay the difference and, until now, lenders and loan officers were not held responsible for these low estimates.
At the beginning of 2010, with HUD's new rules, this was all supposed to change and no longer be an issue for borrowers. The revised good faith estimate now requires that lender-related fees must match from the GFE to the closing of escrow while at the same time allowing only a 10% tolerance, also known as "wiggle room" for these estimates in other areas including title insurance and closing fees.
If there is a significant deviations from the new GFE, which must be issued within three days of a mortgage application as well as the HUD-1 settlement sheet, the lender pay the difference.
Now, two weeks into the new reform, lenders and loan officers are sidestepping the new GFE by giving potential borrowers "fee estimate" forms and "work sheets" that provide no legal requirements for their accuracy, and were not even contemplated under the new HUD reforms.
HUD officials are now saying that they plan to review of the growing use of these "worksheets" and "fee estimate" forms by mortgage lenders and loan officers.
It's felt that these "worksheets" are a reaction by the mortgage industry regarding HUD's new tough GFE rules.
Loan officers are defending the use of these "worksheets" saying that they are a useful tool for handling borrowers who may not be ready to provide all the required application information.
Marc Savitt, past-president of the National Association of Mortgage Brokers recently said, "I think they're a great idea. If somebody is just shopping, we give them an 'initial fees worksheet'. If they make a full application, then we need to issue a GFE."
However, HUD's deputy assistant secretary for single family housing Vicki Bott stated that the new rules do not address "worksheets" and that she will look into how they are being used by the industry.
If the use of these "worksheets" are misleading home buyers or lessening the legal protections provided to consumers by the new HUD rules, Vicki Bott further stated that, "we will need to reach out to the industry" and issue "updated guidance".
It should be noted that there is a difference between informal cost estimates and a true GFE.