One of the biggest complaints from mortgage borrowers in the past was that the initially-estimated cost that their lender charged to originate their mortgages often bore little resemblance to what borrowers actually had to pay when their loans closed. To eliminate these ugly surprises and to thwart the bait-and-switch tactics employed by some mortgage lenders, the U.S. Department of Housing and Urban Development designed a new Good Faith Estimate (GFE) -- the document that outlays all the charges and fees associated with your mortgage loan.
Since January 1, 2010, mortgage lenders have been required to issue the new GFE form in order to ensure that the actual costs of the mortgage substantially match the charges disclosed on the GFE. We talked to several sources to find out if the changes have succeeded in making mortgage lending more transparent.
Shopping for a Mortgage: Has the New GFE Made it Easier?
The new Good Faith Estimate has a lot to recommend it -- HUD estimates that it will save mortgage borrowers an average of $700 in closing costs per transaction. Besides costs, how else does the revised GFE benefit borrowers?
- The important terms of a home loan -- annual percentage rate (APR), rate adjustments and features such as interest-only payments, negative amortization and prepayment penalties -- are disclosed front-and-center instead of being hidden in a sea of boilerplate.
- A new section of the GFE that you fill in when shopping for your mortgage facilitates the comparison between several loan programs, and the requirement that all fees be distilled into a bottom-line figure reduces confusion for borrowers.
- Finally, fees disclosed on the GFE must substantially match the amount that's actually charged. Some fees are limited to an increase of no more than 10%; others cannot increase at all from the estimate. Mortgage lenders that make mistakes on their disclosures will have to eat the difference.
Downside of New GFE Disclosures
The transition has not been easy for all mortgage lenders. While large lenders such as Bank of America have been able to transition to the new form with little trouble, issuing GFEs to anyone who wants one, smaller institutions don't always have the resources for IT and training to make the transition as easily. To cope, many smaller lenders appear to be clamping down on the issuance of GFEs. Calls to several mortgage lenders asking for quotes and specifically requesting a GFE were met with this response: "Well, I can give you a worksheet which shows you what your costs and rate would be, but we can't give out Good Faith Estimates any longer because of the new law." (The Washington Post says that HUD has nothing against lenders using informal worksheets to give mortgage shoppers an idea of a quote, as long as it's clear to the consumer what a worksheet does and doesn't represent.)
In addition, the new forms are not as easy to understand as perhaps HUD would like. A New York Times article quoted a mortgage executive who noted that the number of borrower questions have remained about the same since the implementation of the new form but have shifted in focus, and that the new GFE has simply "replaced one kind of confusion with another."
Challenges for Mortgage Lenders
The new law does not make it illegal for lenders to issue GFEs before you make an official application. What it does is create a responsibility to honor the fees disclosed. Many lenders are concerned that a mistake in disclosing third-party fees like title and escrow charges early in the process would end up on their bottom line -- and under the new law, it could. So rather than put their profits in the hands of employees who may not be fully aware of what title and escrow companies charge, these companies prefer to avoid making such disclosures before they are legally required to -- which is within three days of you executing an actual loan application.
Special Challenges for Mortgage Brokers
Mortgage brokers have special problems because, unlike banks, they work with many different lenders and programs. Not only do brokers deal with different title and escrow charges, they also have varying sources of funding, and wholesale lenders may impose different rules for the way charges must be disclosed.
California mortgage broker Kris Taraz of Inhouse Capital explained how the new GFE requires workaround reporting that creates additional confusion for the borrower. "If we offer you a 4.875% rate and the wholesale cost is 0.25% and we are making a rebate of 0.75%, it needs to reflect the 0.25% to the lender (same as before January 1, 2010); nevertheless, in California, our 0.75% rebate, which comes from the lender, needs to be reflected as an origination fee charged to the borrower. Consequently, should I quote you 4.875% at 0.25 points knowing that I receive 0.75% from the lender, you will be surprised when you see the GFE and worksheet, as my rebate of 0.75% would show as an origination fee charged to you despite the fact that you are not paying this. So essentially [the new GFE] creates a problem, since we are quoting the borrowers one thing and then furnishing them with a GFE that is totally different along with the wrong APR."
Taraz has actually taken the time to redesign HUD's GFE and would like to see his form adapted to make shopping less confusing for borrowers. But as long as the new form is in force, he issues the government version and has not resorted to worksheets.
Lenders Work with the New System
In spite of the challenges, mortgage lenders largely welcome the changes. Not one agent interviewed for this article expressed anything but approval that the deceitful lenders will now have a harder time undermining the honest ones. Shane Hulslander of Premier Mortgage Consultants in Florida was able to provide a full-fledged GFE in minutes when asked to provide one. The estimate showed a cost of 1 point, offset by a credit of 1 point -- an easy-to-understand entry allowable in Florida. This prevents any APR distortion and is meant to reduce borrower confusion.
"The new RESPA guidelines help everyone that is part of the financing transaction from the title company and the borrower down to the lender/broker," said Hulslander. "I am glad the bait-and-switchers will be slowly weeded out of the industry; they have been giving mortgage professionals a bad rap for way too long. The old bait-and-switch tactic was always a big concern of clients -- they have been shown an estimate that looked too good to be true and came to find out at the closing table that it was. You can't imagine how glad I am to know those days are gone."
Mortgage Lenders Need Accurate Information from You
Since lenders are largely held to the amounts disclosed in their mortgage quotes, they need a lot of information from you to provide an accurate estimate. Even something as minimal as a 1-point difference in your credit score can cause a huge change in fees. The property address, value or sales price, down payment or amount of home equity, your Social Security number, your monthly income, the property type (condo, single-family home, manufactured housing) and use (primary residence, second home, rental) are all needed to come up with an interest rate and lender fees. If you are willing and able to provide such information, a lender is able and should be willing to issue you a GFE, not just a simple worksheet.
Bait-and-Switch not Entirely Eliminated
While none of the mortgage lenders audited or interviewed for this article promised interest rates they couldn't deliver, the new law doesn't completely eliminate baiting and switching for mortgage shoppers. The law only requires that the final closing statement match the last GFE issued, and new GFEs can be issued whenever there is a material change in the application. For example, a lender is not committed to a given rate and fee structure until you actually lock in your mortgage rate. When you lock, you get a new GFE. Ditto if your property appraises for less than expected. Or, if your credit score changes, you get a new job or you decide you want a 30-year fixed loan instead of a 5/1 adjustable-rate mortgage, all these events constitute material changes and can trigger a new GFE. It's the last GFE issued before you close that the lender is held to.
Some Lender Tactics
An article in Mortgage Professional Magazine illustrates some lenders' reluctance to provide information. In "Three Ways to Transform the New Good Faith Estimate into Your Secret Weapon," Gibran Nicholas recommends that lenders not issue a GFE too soon in the loan process. Instead, he says, mortgage professionals should put off borrowers until they actually apply and are entitled by law to the disclosure. He further recommends that lenders not complete the voluntary parts on page three, withholding information that would "help clients shop them out of business." Finally, he admonishes lenders not to guarantee the interest rate beyond one day, saying that "the smartest way to deal with Line 1 of the GFE is simply don't guarantee the interest rate."
Borrowers should insist that any lender they deal with provide a full GFE, or keep looking. Don't waste your time with any lender that isn't confident its rates will stand up to comparison.
Shopping for a Mortgage with the New GFE
Get a few GFEs when comparing mortgage rates upfront, then double-check your mortgage quote when preparing to lock in your rate. Use sites like HSH.com to track mortgage interest rate trends; if you see that rates are dropping but yours mysteriously increases when you lock, it's time to have a serious conversation with your loan agent. Once you have a final GFE and lock your mortgage interest rate, your lender is fully committed to you, and there should be no surprises at the closing table.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.