The Feds have Proposed…an Overhaul of the Mortgage Process

I’m not going to pretend that the mortgage process is easy, simple, a no-brainer. It’s not. And clearly, after watching the subprime mortgage market take the dive it has, you can’t argue that an overhaul is not long overdue. Everyone is getting hurt, if they aren’t buried already in debt.

My problem is with the way we do things in the industry, the way lenders hide or are less forthcoming with the terms, and how regulatory agencies allow for this to happen. True, without the lenders, these agencies wouldn’t have a job–so there is some ingrained lack of desire to completely make the process transparent to the borrower, because if the lenders aren’t making a profit, they’ll figure out another business to go after and bye bye industry. That said, I think the process should be plain and simple. If a lender is offering a teaser rate to get the borrower into a home, the lender should say, Look, Mr. Buyer, this rate is only good for x days, and after that date, your payment is going to shoot up to Y. Think about it. It may not be a good deal for you to borrow at this rate, because you only make $2,500 a month, and the payment is jumping to 80% of that. And unless you have no other expenses, and someone else is going to be taking up the slack, you’re destined for failure. Yes, I do mean being that open about the negatives. We have a housing crisis and a foreclosure crisis and a zillion other things going wrong with our economy, and it’s time the big banks and lenders got slapped around a little. I’m not a proponent of not helping them out–I understand the need to do so, and how that will benefit me and everyone else in the long run. But I’m also a believer that there should be penalties to riding the wave of prosperity during the boom in the housing market (and any other market, for that matter), when things go sour. I’d love to see the mortgage lenders and the bankers and the investors making bucketloads of cash during the good times also pay for their irresponsible behavior later on–because everyone should pay the piper. If you take the risks, enjoy the rewards. But pay the price when that time arrives as well. It’s only fair.

Below are the proposed changes to good faith estimate from Bankrate:

• After providing basic information to the broker or loan officer, the applicant would receive a four-page good faith estimate of closing costs. The first page would give a standardized summary of costs. The next three pages would provide details about the fees — and tips on how to compare loan offers.

• The good faith estimate, or GFE, would have to be somewhat accurate. The total charges couldn’t exceed the estimated total by more than 10 percent.

• The trade-off between interest rates and lender’s fees would be clearer: A “no closing cost” mortgage has a higher rate than a home loan in which the borrower pays fees out of pocket.

• A broker’s compensation from the lender, in the form of yield-spread premiums, would have to be disclosed.

• It would be easier to compare the numbers on the good faith estimate with the numbers on the final HUD-1 statement of fees. The HUD-1 is the final statement of mortgage-related fees that the borrower gets at closing. Right now, the GFE and HUD-1 don’t have to look alike, making it difficult to compare them side-by-side to see how the fees changed between application and closing.

• Someone would have to read aloud a “closing script” that accurately summarizes the loan deal and the settlement charges. Any inconsistencies between the rate and fees described in the GFE and the final rate and fees would have to be pointed out.

• Many homebuilders have “affiliated business arrangements” with mortgage lenders and title companies. The builders tell homebuyers something like this: “If you don’t use our approved mortgage company, you’ll have to make a bigger earnest-money deposit, and you won’t get a $2,000 ‘closing incentive.’” The proposed regulation seeks to ban that much-complained-about practice.