It has been barely two weeks since the nationwide changeover in mortgage and settlement procedures took effect, but early results are trickling in: Lenders and brokers say just about everything is taking longer, and the costs to home buyers are moving up.
On Oct. 3, under a directive from the federal Consumer Financial Protection Bureau, lenders, title insurers and settlement agents were required to comply with a new, nearly 1,900-page rule book designed to improve transparency and accuracy in real estate and mortgage transactions for home buyers and refinancers. The regulations impose potentially heavy penalties on lenders that get their cost estimates wrong or fail to deliver accurate disclosures to consumers on prescribed timelines at application and closing.
Though the new disclosures are widely regarded as improvements over the ones they replaced — the traditional good-faith estimates, truth in lending and HUD-1 settlement forms — there have been concerns for months that the reformed process would increase the typical time span between loan application and the final closing.
What has received less attention, however, are the impacts of longer timelines on how much consumers pay to do the deal. Now those increases are coming into clearer focus, as lenders take new applications and quote rates and fees.
Diann Tyler, president of Everest Home Mortgage in Philadelphia, says she has received and begun processing multiple applications since Oct. 3, and nearly every one carries higher loan-fee charges than would have been the case under the old rules. Why? Because most clients are opting for longer rate-lock periods, and those longer locks cost more money. Typical rate locks guarantee borrowers that they will pay no higher rate than what is stated in the loan quote. They can run anywhere from 15 to 60 days or more, and involve capital-market hedges by the lender to obtain the rate guarantee.
Tyler’s standard rate lock used to be 30 days, but now clients need at least 45 days. That can add an extra $500 onto her quotes for average-size loan requests, she told me, depending on market conditions and the bank or investor she’s using to fund the mortgage.
Sometimes the extra charge won’t be obvious to the borrower because the money is being subtracted from the “lender credit” they receive. “But the fact is, they’re paying more” than they would have on the identical transaction before Oct. 3, Tyler said.
In Huntington Beach, Calif., Dennis Smith, co-owner and broker at Stratis Financial, says that in order to cope with the strict compliance requirements of the new disclosure rules, he has had to hire another staff person. He’s not yet certain how this additional expense will factor into individual borrowers’ fees — that will depend on application volume and “market factors moving forward,” he said — but one can assume the added salary and benefits will be reflected in charges somewhere.
Tim Kleyla, president of the Mortgage House in Holland, Mich., says that because of the tight time requirements of the new rules, higher rate-lock costs and the danger that shorter-term locks will expire before closings, “we are throwing [short locks] out the window and will be locking for 45 to 60 days.” Given the higher costs for these longer locks, higher underwriting fees from funding sources and his own higher compliance expenses, typical borrowers could see “another $500 and I am sure eventually more” on their total transaction costs, he said.
Michael Fratantoni, chief economist for the Mortgage Bankers Association, says the expenses added by the new settlement rules come on top of a long series of federal regulatory changes in the past several years that have pushed the cost of originating a typical mortgage from $4,500 to $7,000. “A lot of it is personnel, quality control, spending on new technology” and reprogramming systems.
So what can a home buyer do to limit some of these costs? Probably not a lot, except shop vigorously and compare lender fees and lock policies. As time goes on and lenders and settlement agents gain experience in managing deadlines under the new rules, maybe 30-day closings will become more common again, making longer locks unnecessary. For now, though, you’re likely to see higher, not lower, charges.
But given the fact that the new regulations also require delivery of your final closing disclosure three days ahead of the settlement date, giving you plenty of time to spot problems and dispute charges, who knows? Maybe the rule changes could actually end up saving you money.
Ken Harney’s e-mail address is firstname.lastname@example.org.