Almost anyone who has bought a house or taken out a mortgage in recent years knows the problems:
Lenders' "good-faith estimates" of loan and settlement fees provided at application are too often off the mark. Eleventh-hour charges can add hundreds or even thousands of dollars to the bottom line at closing. No federal regulation requires strict adherence to the estimates, and no government agency pursues lenders that fraudulently lowball their estimates to pull in more business.
The process of obtaining a mortgage lacks transparency, and loan features often are confusing to consumers or are not explained by lenders and brokers. That confusion is why so many borrowers are locked into bad loans they never understood in the first place.
There is too much pressure to use lending, title and settlement-service affiliates of builders or real estate brokers. Builders, for example, sometimes dangle $10,000 to $30,000 worth of "incentives" in front of purchasers, but only if they'll use the builder's affiliated lender, frequently with mortgage rates and fees that are higher than those charged elsewhere.
Those and other problems are targets of an effort by federal authorities to reform the system with better disclosures and a crackdown on scammers.
It's the Bush administration's second attempt to push through settlement improvements. An effort in 2002 was hounded by lending, real estate and title industry critics and was withdrawn.
The latest effort, outlined March 14 by the Department of Housing and Urban Development, would transform the good-faith estimate into a comparison-shopping tool, force lenders to guarantee that their estimates are accurate, and walk borrowers through closing procedures with a new consumer-friendly "script" for settlement and escrow agents nationwide.
Among the key changes you can expect if the proposal is adopted after HUD's 60-day public-comment period:
A nationally uniform good-faith estimate that is laid out graphically to highlight the key features of a loan, including interest rate, points, origination fees, prepayment penalties, potential payment increases, escrows, title insurance and closing charges. The form prompts applicants to take the lender's estimates and compare them with estimates provided by as many as three competitors.
The form was tested by focus-group researchers who found that they enabled consumers to pick the "best" loan deal -- lowest rate, lowest total fees and most advantageous terms -- 90 percent of the time.
Strict limits -- the first ever imposed -- on variations between cost estimates at the application stage and the final charges that appear on the settlement sheet. Certain costs controlled by lenders could not increase from the application to the closing, except in tightly defined "unforeseeable" circumstances such as wars or disasters. Total settlement fees could never be more than 10 percent higher.
All fees paid to mortgage brokers tied to the interest rate must be disclosed and labeled as a "credit" to the borrower. This is intended to flag extra payments that brokers and some loan officers receive for steering applicants into higher-rate deals. At the same time, though, the rule change allows cash-short borrowers to pay for closing costs with a slightly higher interest rate.
Incentive packages marketed by builders and others that pressure consumers to use affiliated companies -- but don't deliver economic benefits or discounts -- could violate the law under the new proposals. For example, builders incorporating "incentives" into the selling prices of homes but requiring use of affiliated mortgage, title and settlement agencies to obtain those savings would violate the rules.
On the other hand, incentives and discounts that are real -- in which buying a package of mortgage, title and other services costs much less than they would if purchased individually -- would be permitted.
The proposals were greeted initially with broad statements of approval from major lending groups, but some critics said they will require extensive and costly changes in the mortgage and settlement-services industries.
Phillip L. Schulman, a Washington lawyer who represents title, mortgage and settlement clients, called HUD's proposal "complicated, confusing and controversial" and predicted tough opposition from industry groups.
Brian D. Montgomery, assistant secretary for housing, disagreed. "The timing is right," he said. "There is a lot of anguish out there" among homeowners saddled with confusing loan, he added.
VA Update
Rep. Steve Buyer (R-Ind.), ranking minority member of the House Veterans Affairs Committee, has introduced a bill that would amend the economic stimulus legislation to raise VA loan limits to the same levels as those for Federal Housing Administration, Fannie Mae and Freddie Mac loans. Senate Veterans Affairs Committee Chairman Daniel K. Akaka (D-Hawaii) introduced legislation to do the same but would extend the time limit on VA increases to Dec. 31, 2011, rather than Dec. 31, 2008, as in the stimulus law.
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