| HUD’s
New Rules
The
mortgage industry has been anxiously awaiting HUD’s
closing cost reform package. The public comment
period and HUD is now considering a final ruling.
There is no doubt that whatever rules they come
up with, it will be an improvement over the terrible
system now in effect. As is usual with government
regulation, however, the proposal and accompanying
press releases from HUD promises rewards for consumers
that it won’t ever deliver, still allows opportunities
for unethical originators to abuse their clients,
and creates a new opportunity for lenders to make
money at the consumers’ expense.
First,
HUD promises $16 billion in savings to consumers.
With 10 million loans originated annually, that
amounts to $1,600 per transaction. That far exceeds
the gross income of all settlement providers in
the average transaction and it is a totally unrealistic
possibility. No one, lenders, appraisers, or title
companies, is going to start doing loans for free.
Second,
originators such as mortgage brokers have always
had to spell out their fees on the Good Faith Estimate,
but HUD does not have enough staff to investigate
abuses, so there are no penalties for lying. Thus
a lender could pad fees at the end if they thought
they could get away with it. The new regulations
propose that they spell out the maximum fee they
can charge, but that maximum might be well in excess
of what they might expect to charge.
Under
the proposal, a lender could still list its maximum
fee as, say, 2 points, tell the customer verbally,
“That’s just what we put on the form, but we normally
charge only 1 point.” They could then gouge the
customer charging 1.5 points, but still be in compliance
with the regulations.
Third,
a guaranteed closing cost package is a joke. Other
settlement providers are regulated too, such as
title insurance companies, whose fee structures
are typically approved by the Department of Insurance
in each state. Consumers already have that portion
of the package regulated. Under the regulations,
lenders will be able, under the guise of providing
a guaranteed package, to mark up the costs of other
providers, a practice now forbidden. If anyone
believes that lenders will pass up this opportunity
as a means of increasing their profits rather than
passing negotiated savings along to consumers, let’s
go outside, because I’d like to see your turnip
truck.
To
avoid being subjected to abuses, borrowers should
get an education about the process so they better
understand their choices. Most homebuyers spend
more time trying to figure out which DVD player
to buy than how to get a mortgage. Well armed by
knowledge, they can then search for an ethical provider
who can help them, rather than engaging in insane
rate shopping that only identifies the biggest liar.
Finally,
if you choose to deal with a mortgage broker, it
is possible to enter into a contract with them wherein
they commits to a specific fee that they will earn,
not a maximum, for services they provide. Then
get both the broker and the lender he chooses to
specify all their fees to the escrow company so
it can prepare an Estimate Closing Statement.
This estimate should be within $100 of the final
closing statement except for the borrower’s choice
to pay more or fewer points. The final closing
statement will show what the broker made as Loan
Origination Fee and any rebate listed as a “P.O.C.”
item. If the total of those two items is more than
you and he agreed upon, take the offender to Small
Claims Court for a refund.
In
short, borrowers should take responsibility for
their own actions and not rely upon the government
for protection. Saving $1,600 is easy, but it comes
from first establishing your goals, and then making
good decisions about what mortgage choices best
helps you meet those goals.
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