Posted on Sun, Feb. 14, 2010
On the House
Do HUD’s rules ease buying?
By Al Heavens
Inquirer Real Estate Columnist
Since I touched on them last week when writing about first-time buyer Lisa Davis, several readers have asked me to delve more deeply into the revised settlement procedures resulting from changes in rules crafted by the U.S. Department of Housing and Urban Development.
HUD has given the mortgage industry one year from Jan. 1 to incorporate the changes.
Peter Buchsbaum of Arlington Capital Mortgage in Horsham says the decision to change the rules was overdue, but “the execution has been not so welcome by the industry and the public.”
“The idea was to provide a number for the customer to shop with and make the costs ‘transparent,’ ” Buchsbaum said. “Most, if not all, of the accountability is on the mortgage lender. There is nothing on the Realtor or customer.”
The changes are designed to protect consumers and save what HUD says is an average of $700 in mortgage costs.
I’ll list the basics provided by HUD. If you want the latest and most in-depth explanation, turn to http://go.philly.com/closing.
HUD requires lenders and mortgage brokers to provide consumers with a standard Good Faith Estimate clearly disclosing “key loan terms and closing costs.”
Closing agents – title insurers and lawyers – also are required to provide borrowers with a new HUD-1 settlement statement that clearly compares consumers’ final and estimated costs.
The new Good Faith Estimate, or GFE, is supposed to be easy to read and answer key questions buyers have when applying for a mortgage, including:
What is the term of the loan?
Is the interest rate fixed?
Is there a prepayment penalty affecting the borrower if he or she chooses to refinance later?
Is there a balloon payment (a large, lump-sum payment usually coming at the end of the loan term)?
What are total closing costs?
The GFE has been cut to three pages from four. A page of instructions has been added to help borrowers better understand their loan offers.
Buchsbaum says “the new GFE does not break down all of the individual fees, so ‘shopping’ becomes difficult at best.”
Holden Lewis of Bankrate. com says he thinks the new GFE is less confusing and encourages consumers to shop for closing services.
A few things are “missing or misguided,” he adds: HUD’s rules, for one, effectively discourage lenders from offering preapprovals.
It is now risky for a lender to issue what Lewis calls a “generic GFE” for a blank or dummy address, such as 123 Main St. Lenders won’t issue a GFE unless it’s for a specific property address.
So if a consumer wants to know what the closing costs will be for a certain loan amount, but without a specific address, the lender hands out a nonbinding, prequalification worksheet instead of a semi-binding preapproval in the form of a GFE.
To help borrowers compare their Good Faith Estimates with their HUD-1s, each designated line on the final HUD-1 refers to the relevant line on the GFE, HUD says.
Not quite, Lewis counters.
“HUD should have redesigned the HUD-1 to resemble the GFE, to make the comparison easy,” he says. “Instead, HUD stuck footnotes onto the HUD-1.
“A lot of borrowers are going to look at that and say it’s too much of a bother to figure out if the lender estimated the fees accurately in the GFE,” Lewis says.
Weichert Realtors’ Media office manager, Noelle Barbone, was a real estate agent when HUD came up with the 1974 law designed to make home buying more consumer-friendly.
She considers the latest changes “very cumbersome.”
“I think some of it is good – to ensure the consumer is not blindsided by bait-and-switch tactics, but some of it is overkill,” Barbone says. “It is what it is.”
What it is is a “nightmare,” Philadelphia mortgage broker Fred Glick says, “especially since no borrower understands it, and the banks don’t have to use it.”
Inquirer real estate writer Alan J. Heavens is the author of “Remodeling on the Money” (Kaplan Publishing). His home improvement column appears Fridays in Home & Design. “On the House” appears Sundays in The Inquirer. Contact Alan J. Heavens at 215-854-2472 or firstname.lastname@example.org.