The Nation's Housing
Reporting and analysis of tax laws, mortgages and markets make for indispensable real estate coverage. Once a week.
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WASHINGTON -- Everyone knows that financing and closing on a home purchase can be complicated. Which is why more than a year ago the Consumer Financial Protection Bureau issued a set of new disclosures and rules designed to bring greater clarity -- and certainty -- to transactions.

So how’s that going? Maybe not so well from a consumer perspective, if a new survey of 1,000 first-time and repeat purchasers is any guide. Sponsored by ClosingCorp, an industry technology firm, and conducted by Wilson Perkins Allen Opinion Research, the study found that more than 50 percent of buyers were “surprised” by the amounts they were charged at closing, despite the new federal disclosures aimed at eliminating or sharply limiting surprises.

Buyers also told researchers that “52 percent of lenders were ‘off’ on their initial loan estimates” of the fees required to obtain and close on the loan. Fifty-eight percent of buyers said their initial loan estimates had changed or been revised before closing, and 35 percent said their total fees were higher than they had expected. Just 31 percent of buyers reported that there were no shocks or surprises at closing because their lenders’ upfront estimates and the final charges were in sync. A stunning 17 percent of buyers said they were not even aware that closing costs are required when obtaining a home mortgage.

The CFPB’s two new disclosure forms -- the Loan Estimate and the Closing Disclosure -- replaced the previous Good Faith Estimates, Truth in Lending and HUD-1 settlement statement, which had been in use for many years. The Loan Estimate covers the key information an applicant needs to understand a mortgage quote: principal and interest payments, mortgage insurance premiums, taxes, hazard insurance premiums, closing costs, recordation fees, homeowner association fees and the amount of cash the borrower will need to close. The Loan Estimate must be provided to the buyer within three business days following an application.

The Closing Disclosure itemizes final settlement charges and must be delivered no later than three business days in advance of closing or the date on which the borrower becomes contractually bound to the terms of the deal. The rules governing the disclosures allow for changes by the lender -- including increases in charges -- under certain limited circumstances, but at the end of the process the itemized charges in the Loan Estimate typically should line up with the final closing costs.

Bob Jennings, CEO of ClosingCorp, told me in an interview that it’s clear that “a sizable portion of the industry still doesn’t have a firm grasp on fees,” and therefore must make updates to disclosures during the process that can be confusing to borrowers. Jennings rejected the idea that because the CFPB’s regulations governing the new disclosures were lengthy and complex, lenders have had trouble getting the numbers right upfront. To the contrary, he said, the disclosures are expressly designed to put strict “accountability on lenders” for their estimates -- a major problem under the old disclosures when borrowers sometimes wouldn’t learn about increases in expenses until the day of the scheduled closing.

Pete Mills, a senior vice president at the Mortgage Bankers Association, told me that although there was an initial learning curve for lenders in gearing up for the new rules, “our sense is that things have gotten better.” He cited an industry audit by Aces Risk Management that found that by mid-year 2016, just 1.63 percent of loan files contained “critical defects” -- errors in the documents or the procedures followed by lenders that violated CFPB’s rules.

Mills said the fact that 58 percent of buyers in the ClosingCorp survey reported their initial loan cost estimates had changed “is evidence that the rule is working as written.” When there are changed circumstances affecting the application, the lender is supposed to reflect that in the disclosures.

Asked for comment on the ClosingCorp findings, Sam Gilford, a spokesman for the CFPB, said the “survey results show that lenders and closing agents can do more to educate borrowers about the purchase process and associated fees, and for lenders to improve the initial accuracy of their loan estimates.”

What does this all mean for you if you’re planning to buy a house or get a mortgage? Most important: Be aware that even if there is a change or two to estimates along the way, ask your lender for explanations immediately, and make sure you receive and review your final closing charges well in advance of the settlement. You should never end up surprised.

Ken Harney’s email address is kenharney@earthlink.net.

(c) 2017, Washington Post Writers Group

WASHINGTON -- If you’re like millions of homeowners, you recently received a familiar, innocuous-looking document from your lender. It’s called Form 1098 and it totes up how much interest you paid on your mortgage last year. Your lender is required by law to fill it out and send it to the IRS.

But there are key differences in this year’s form that are easy to miss yet potentially important to you -- and could trigger an audit by the IRS. Under an obscure statutory change buried in a federal highway bill that passed Congress in the summer of 2015, your lender must now disclose more information to the IRS about your loan, including the amount of the outstanding principal balance at the beginning of the year, the origination date of your mortgage and the address of the home securing the loan.

What’s up with these changes? Though the IRS had no immediate comment when I asked whether it is ratcheting up its scrutiny of home mortgage interest deductions, that appears to be the case. As one of the largest write-off in the tax code -- with a projected $357 billion revenue cost between fiscal years 2016 and 2020 -- the mortgage deduction is a fat target. Plus the rules governing eligibility for taking deductions are complex, and government watchdog agencies have been critical of the IRS’s oversight of this area in years past.

The lack of crucial datapoints in the previous version of the 1098 form made it challenging for the IRS to determine whether some properties qualified for interest deductions, or whether the claimed amounts were in sync with reported incomes or based on mortgage amounts that exceeded the tax code’s limits of $1 million in “home acquisition debt” and $100,000 of “home equity debt.”

Acquisition debt, according to IRS Publication 936, is the mortgage amount you use to “buy, build or substantially improve” your principal residence or second home. Home equity debt is mortgage money secured by your residence that you can use “for reasons other than” buying, building or improving your primary or second home. If your acquisition debt exceeds the $1 million limit, you can use up to $100,000 of home equity debt to extend the total deductible limit to $1.1 million.

Among the areas of potential exposure with the new Form 1098 for some homeowners, say tax professionals, are certain refinancings. Charles Benway, a CPA and certified financial planner with Main Street Financial LLC in Mt. Kisco, New York, told me many owners are not aware that when they pay down their original mortgage amount over a period of years, their acquisition debt for federal tax computation purposes declines. When they later refinance into a larger loan and use the proceeds for purposes other than buying, building or improving, a portion of the mortgage interest they pay to the lender may not be deductible.

Benway offered this hypothetical example, which was also included in an article he wrote for Kiplinger.com. Say you buy a house with a $500,000 mortgage and, over time, you pay down the principal to $300,000. Meanwhile your home increases in value to $700,000 and you refinance into a new loan of $500,000, paying off the $300,000 balance. But you spend the $200,000 remaining proceeds on student loan debt, a new car, new furniture and credit card bills.

In this scenario, your acquisition debt remains at $300,000 and your home equity debt limit is $100,000, giving you $400,000 in mortgage debt that qualifies for interest deduction. But that’s $100,000 short of the $500,000 amount you borrowed in the refinancing. The $400,000 is 80 percent of your $500,000 mortgage balance, and that means “only 80 percent of the interest is deductible” on the tax return you’re filing.

It’s complicated, Benway says, “but I think it’s going to hit people” once the IRS begins feeding this year’s 1098 data into its computers. Greg Rosica, a tax partner with accounting firm Ernst & Young in Tampa, Florida, agrees that some refinancings will attract more attention from the IRS, but he says the most likely targets initially will be taxpayers with large mortgage balances.

Bottom line for you: Be aware of the important changes to Form 1098. Just because your 1098 says you paid a certain amount of interest last year doesn’t automatically mean that’s what you can deduct. Download a copy of the IRS’s Publication 936 at IRS.gov to review the mortgage interest deduction rules, and consult a tax professional if you’re not certain how you might be affected.

Ken Harney’s email address is kenharney@earthlink.net.

(c) 2017, Washington Post Writers Group

WASHINGTON -- If your real estate agent requires you to get a mortgage pre-approval from one specific lender as a condition of submitting an offer to buy a house -- even if another lender already pre-approved you -- would you think something is fishy?

If an agent offered discounts off the price of the house you want to buy -- but only if you used a designated lender for your mortgage -- would you be suspicious? What if the agent’s sales contracts had the name of a lender “written in” to the deal? What if you could be charged higher transaction fees for not using the preferred lender?

Would you wonder, just a little, whether kickbacks could be in play?

You might, and a set of new federal actions against real estate and mortgage companies would give you good reason. In landmark settlements with one of the country’s largest retail mortgage lenders plus two real estate brokerages and a home loan servicing company, the Consumer Financial Protection Bureau alleged that they participated in illegal referral schemes aimed at home buyers and sellers.

The settlements shed fresh light on what realty industry and legal experts say is a persistent problem: Brokers and agents continue to pocket cash and other compensation for steering business to lenders and title companies in violation of federal anti-kickback rules, as interpreted and enforced by the CFPB. The new actions are a signal to realty firms that they are not exempt from penalties for taking payments for referrals. Earlier cases primarily targeted lending or title firms, not the brokers and agents who actually took the kickbacks.

Prospect Mortgage LLC, a California lender active nationwide, had “improper” agreements with more than 100 realty firms designed to “funnel payments to brokers and others in exchange” for mortgage referrals, according to government consent order documents. The arrangements took varied forms, but all had the effect of steering buyers to obtain mortgages from Prospect. The government said “thousands of consumers” were illegally referred to the lender through under-the-table arrangements.

The CFPB also moved against two realty brokerage firms -- Re/Max Gold Coast of Ventura, California, and Keller Williams Mid-Willamette of Corvallis, Oregon -- for allegedly accepting illegal payments for referrals from Prospect. Dozens of other realty firms that CFPB investigators found had referral deals with Prospect elsewhere in the U.S. were not identified and were not part of the settlements. The bureau would not tell me why they were omitted. The CFPB also took action against Connecticut-based Planet Home Lending, a loan servicer.

All the companies denied wrongdoing as part of their consent orders, but agreed to pay penalties or redress to consumers. Prospect was fined $3.5 million and the two realty brokerages and Planet Home Lending agreed to pay a combined $495,000 in consumer redress or fines.

The consent order with Prospect detailed a laundry list of alleged referral schemes, including:

-- Payments to brokers for hot “leads” -- names, addresses, phone numbers -- of prospective buyers who would then be solicited by loan officers. Brokers “passed on some of the spoils” to individual agents for supplying the leads. One broker openly handed out cash to agents during company meetings.

-- Compensation to agents for their marketing expenses on an unnamed “third party website” in exchange for referrals of shoppers.

-- Allowing some listing agents to impose “per diem” penalties on buyers who used competing lenders and failed to close their sales on time.

-- Having agents insist that home shoppers pre-qualify or be approved by Prospect if they wanted to submit an offer on any house the agent showed them.

-- Inserting Prospect into the “agents only,” non-public comments section on local Multiple Listing Service (MLS) entries of properties for sale as the exclusive lender. Only Prospect-approved buyers could write contracts on houses the agents showed them.

Marx Sterbcow, an attorney based in New Orleans and an expert on the federal law that prohibits kickbacks in home mortgage and real estate transactions, said consumers typically “are completely unaware” of these illegal arrangements. Often they are difficult to detect because they are carefully hidden from buyers and sellers.

Despite that stealth, here’s a key fact for you to know to avoid being shunted to a lender or other vendor who may not have the best rates or service in your area: You are guaranteed the right under federal law to shop for the best deals on your financing and settlement services, even if your realty agent seems to be` pushing you toward one source in particular.

Ken Harney’s email address is kenharney@earthlink.net.

(c) 2016, Washington Post Writers Group

About
Newspaper readers have a trusted friend in Kenneth Harney's award-winning real estate column, "The Nation's Housing." That's because week after week he focuses on the real issues faced by today's record number of homeowners -- complicated tax problems, the settlement fee thicket, credit scores and credit files – and guides readers to smart solutions.
Millions of readers have saved – and will save – money because of Harney's undeviating attention to the American housing consumer's best interests.
Over the years, Harney's columns have contributed to key pieces of housing reform on Capitol Hill and in federal agencies, including cancellation of private mortgage insurance premiums, better disclosures on refinancings, restrictions on private transfer fees, and prohibitions against loan transfer abuses and predatory mortgage servicing practices.
Personal
Harney lives in Chevy Chase, Maryland, with his wife Andrea. The couple has four grown children who live in Shanghai, San Francisco, New York, and Silver Spring, Maryland.
Professional Experience
Member of the Federal Reserve Board's Consumer Advisory Council
Member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination
President and chairman of the board of the National Association of Real Estate Editors
Continues to be a member of NAREE's board of directors