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New Mortgage Laws Are in the Buyer’s Favor at Closing

By the Mortgage Guy /

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For a very long time now consumer advocates have complained about many aspects of the mortgage industry, most especially what can take place at the closing. Time and again home buyers arrive at the closing prepared to sign the relevant documents and take possession of their new home only to discover that the costs of the closing have escalated and not by a small amount either. To add insult to injury the estimate of closing costs that was previously presented to buyers in preparation of the closing, which is called the Good Faith Estimate (GFE), was not actually presented in good faith at all. It became common practice for the estimate to escalate, and rarely if ever, go down in cost.

As of the first of the year, 2011, the Department of Housing and Urban Development (HUD) mandated new rules and policies that they hope will lessen the surprises for buyers at the time of closing.

HUD has changed the process in how the fees are to be figured and a standardized format has been implemented where there previously was little uniformity. In the past lenders used different forms for different buyers. The new forms are intended to make cost comparisons easier. Caps have also been put into effect that will prevent closing costs from rising as much as they used to so that the original GFE figures will be the same at the time of closing on HUD’s form 1, which is the designation of the final settlement statement.

Although the new GFE policies can help in reducing costs to a degree, many feel that the usury process of opportunistic closing cost pricing will continue and be unpreventable.  One classic way of abusing costs at different closings is actually a very simple one. If a lender finds they are negotiating with a savvy buyer he will rein in his costs, but if he feels that he is negotiating with someone who does not understand the transaction he will simply inflate the costs to the degree he thinks he can get away with it. As of now there is no way for the government to offer relief and prevent these practices form occurring.

It is also surmised by those in the business that even though some costs will come down as a result of the new regulations and caps, other fees will then be inflated to compensate and build back the amount lost. After all, lenders now have to retrain the staff responsible for loan origination on these the new forms and policies, new software will need to be purchased, as well as the new versions of documents and forms.
Many also feel that the loan process, one which the average homebuyer already had difficulty understanding, will be even more confusing and frustrating, which will also create more doubt and a lesser sense of credibility at a time when the industry needs to bolster its reputation.

The new GFE rules stipulate the following:

  1. Lenders origination and underwriting charges, and the credit or “points” calculated on the exact interest rate chosen will not be permitted to change from the original estimate.

  2. Services that a lender will require and recommend to the buyer are allowed to increase by 10%. If a buyer decides to appoint his own provider for the title insurance service and the recording charges those may not fees increase by more than 10% at closing time.

  3. Some fees will still be allowed to escalate without any constraint, and this is an effort to encourage the borrower to shop around for their own homeowner’s, flood and pest insurance. By taking this responsibility away from the lender an effort is being made to prevent the unwanted escalation of third-party charges which is where so much of the previous abuse was occurring, as these fees previously had not cap or limit.

As of April 1, 2011 new rules are in place to prevent lenders form pushing borrowers into more costly mortgages.

One of the problems of the past that helped to frustrate the mortgage and home markets was the practice of loan originators nefariously offering borrowers more costly loans in an effort to increase their own compensation for the work they were performing.

The new regulations also stipulate that brokers and loan officers cannot be compensated relative to the interest rate or terms of any loan they may help to arrange. The regulations now in effect also prohibit the loan originators from receiving fees from both the lender and the borrower. Hopefully these new rules will protect borrowers from being pushed into loans simply to increase the originators income.

The Fed has also implemented on a trial basis rules that demand the lender disclose exactly how mortgage payments can change if the mortgage is an Adjustable Rate Mortgage (ARM). The lender must explain in accurate detail the maximum rate they could be charged over the course of a loan’s first five years, and they must also detail what could be the worst case scenario and remind borrowers that refinancing an existing mortgage may not actually steer them clear of higher payments. Before a conclusive solution is reached on the final rules the Fed is soliciting comments in an effort to help the situation.

The previous problems with reverse mortgages have also been addressed by a few new rule proposals.

In the past buyers have complained that they have been required or pressurized into purchasing life insurance, annuities and other financial products as a condition of being approved for a reverse mortgage. The proposed new rulings will hopefully forbid this practice.

In conjunction with these proposed rules it is suggested that consumers be required to have credit counseling before entering into reverse mortgages and that advertising for reverse mortgages must be more transparent and contain no erroneous information. Because reverse mortgages can be complicated, and cater to the elderly who may have a bit more difficulty understanding the contract that is being offered, these rulings if implemented will help resolve a situation that many have been concerned about for some.

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