Don’t raise your hands en masse, but how many of you have read every word of your mortgage-loan documents?
If the experts are correct, very few hands just went up.
Just as well, perhaps. Many of the forms are unhelpful at best and at worst are difficult for the typical lay person to understand – though their purpose is, of course, to disclose the nature of the transaction afoot.
“Most of the time, the mortgage companies don’t even come to settlement,” said Realtor Craig Lerch Jr. of Lerch & Associates in Northeast Philadelphia. “They only send the papers and push it off on everyone else, when it is their job.”
Seeing that, too many soon-to-be homeowners assume everything has been taken care of for them.
“All of my clients mindlessly signed where they were directed and automatically bobbed their heads whenever they were asked if they understood,” said Bruce Shaw, a Willow Grove bankruptcy lawyer who spends a lot of time trying to extricate people from foreclosure.
There are exceptions to every rule, naturally: A mortgage rep or real estate agent might have gone over the standard paperwork involved, if not the actual documentation.
Peter E. Buchsbaum, assistant sales manager at Gateway Funding in Horsham, insists “all of the borrowers that I meet understand what they are signing.”
“Do they read every word on all of the documents?” he asked. “I doubt that the lawyers that wrote them have read them in their entirety.”
The forms, Buchsbaum said, are not user-friendly, “absolutely not.”
As an example, he cited the “annual percentage rate” comparison. When buyers shop for mortgages, they are told to consider the annual percentage rate – the interest rate plus fees paid upfront – and not just the rate itself.
“The biggest flaw is that it includes interest, so the APR is higher at the beginning of the month than it is at the end of the month,” Buchsbaum said. “Add to that the lenders do not have the same fees – they name them differently – and hence what is included with one lender is not included with another.
“The APR was a great idea that never worked,” Buchsbaum said.
And, said Shaw, “any document that ‘explains’ adjustable rate loan is far from the comprehension of an average borrower.”
Philadelphia mortgage broker Fred Glick calls APR “a dinosaur that used to help, but now with the tolerances that must be adhered to by the brokers and lenders, it is rendered meaningless.”
“If you know the interest rate and the terms of the instrument, fixed or adjustable-rate mortgage, and details of the ARM; if there are any points, and what are the lender fees and the lender credit,” then you can compare companies and programs, Glick said.
In addition, APR does not include costs not paid to the lender, such as appraisals, flood certifications, and all title company and recording costs, he said.
Jerome Scarpello of Leo Mortgage in Ambler said new regulations on loan originators limit the effectiveness of APR as a tool.
“Lenders earn a fee by doing loans, just as individual originators or mortgage brokers,” he said. “The difference is that the lenders are not required to disclose how much they earn in the APR fees, while under certain circumstances, brokers must.
“The result is a distorted APR that may make a broker’s loan appear to have higher costs, even though the total costs the borrower pays may be less,” Scarpello said.
Buchsbaum condemned the item known as the “Good Faith Estimate,” in effect since Jan. 1, 2010, as a stumbling block to understanding.
“It lacks transparency and was so poorly designed it does not have a signature line on it,” he said.
The Good Faith Estimate lists the settlement charges you will pay and the terms of your loan, if the lender decides to give you one. Federal law requires you to be given the estimate within three days of applying for a loan.
Another key document is “HUD-1,” also known as the settlement statement, the final accounting of all costs and credits associated with the completion of a purchase or refinancing.
HUD-1 indicates how much money the borrower will bring to closing and is typically available for inspection a day before. If the federal government has its way, the HUD-1 form and the Truth in Lending disclosure spelling out consumers’ rights will become collectors’ items.
The Consumer Financial Protection Bureau, established under the Dodd-Frank Financial Reform Act of 2010, is revising both forms and has opened the prototypes up for public comment at its website (see them at http://goo.gl/Z75Br).
The prototypes are longer and more complex than the current two-page HUD-1 and the three-page Truth in Lending documents, the bureau acknowledges, because of additions required by Dodd-Frank and because “we don’t control most of what you receive at closing, so our page-reduction efforts can only go so far.”
The feedback the bureau is receiving isn’t ample. Nor is it favorable.
“Neither form is ‘consumer friendly,’ ” said one title agent. “This is by far the worst yet.”
“Insanity!” said another. “All both new forms do is further complicate an already complicated situation.”
The problem with the revisions? The same Shaw sees in the current forms.
“Most people, when they buy a car or a house, just want to know: ‘How much is it going to cost me per month?’ ” he said. “They never read the fine print.”
“Fine print? Let’s face it, the entire mortgage document is nothing but fine print.”