January 1 marked the implementation of the new Good Faith Estimate (GFE) that resulted from the Department of Housing & Urban Development’s (HUD) reform of the Real Estate Settlement Procedure Act (RESPA).

Here’s a snapshot of the updated GFE:

• The new GFE provides clarity about locked terms. If the buyer is locked, the expiration date is specified. If they aren’t locked, they know it and know when they must lock by in order to obtain the rate disclosed on the GFE. The new GFE also provides an expiration date for the estimate and is only good if the loan funds by that date.
• The new GFE lumps all fees together regardless of who pays them so the buyer can quickly see the total costs of the transaction but will need further documentation in order to determine his/her true out-of-pocket costs.
• The loan originator is responsible for all fees that are not disclosed; even if they underestimate the fees, your buyers don’t take the brunt of that mistake. As a result, mortgage advisors will naturally include on the estimate any possible fees that could be incurred so as to avoid underestimating and paying those costs themselves.

Under these new guidelines, the numbers from the GFE that the buyer was provided are compared with the final numbers on the HUD-1. If these numbers do not match up, or stay within the variance allotted by law, the lender is held personally accountable for the difference in cost.

While the new form was created to offer more clarity to buyers, there are still some instances where there can be some confusion.

For example, let’s assume a lender includes a $450 fee for the appraisal on the GFE form. Once the appraisal is reviewed by an underwriter, the underwriter may call for an appraisal desk review which carries an additional cost of $200. If this unanticipated $200 charge was not disclosed on the GFE form, the lender is required to pay this cost. As you can imagine, this can become quite costly for a Mortgage Advisor.

One way around this personal expense for the Mortgage Advisor is to include a $200.00 line item on the GFE for an appraisal review. And, if it turns out that an appraisal review is not required the borrower will not pay that cost (the new regulations allow the HUD-1 to be less than the GFE, but not more). However, a different lender that the buyer is considering may not include an appraisal review line item in their initial GFE. As a result, the Mortgage Advisor may appear to be $200.00 more expensive than the other lender.

When in doubt, encourage your buyers to talk to their lenders to ensure they understand the listed fees and any variances among lenders.

Here are a few more considerations associated with this regulation change:

• Your more experienced buyers may be expecting to receive a GFE when they get pre-approved for a loan. Due to the many variances in costs associated with a loan, we will not issue a GFE until buyers are in contract. We will be able to provide them estimates of the costs and fees of their expected loan amount, but it will not be in the form of a GFE.
• In the few instances where there are changes to rates or fees (e.g., if not locked when original GFE was provided or the borrower requests changes – in writing) the lender is authorized to change the settlement variables from the original GFE if the client signs the “Change of Circumstance Affidavit” at least 3 days before the loan closes. In these cases, the updated GFE must be provided to the buyer within three days after receiving the information or request. The basis for the revision must be documented and retained for at least three years after settlement. NOTE: The GFE cannot be updated to adjust fees that are not relevant to the changed circumstance.
• Due to these regulatory changes, we require a firm estimate of final title and escrow costs (doc prep, wire fee, endorsements, copying, etc. . . ) within 24 hours of opening escrow. The final HUD-1 title and escrow fees must not exceed the estimate that the lender provided to the buyer in the GFE. If they do, the lender must personally pay for that difference.

Losing one’s home is a gut-wrenching experience. It’s something no one should have to go through. Now, sadly, many, many people are having to do just that. In many cases, however, there is another answer.

The Home Affordable Modification Program, or HAMP.

Part of the Federal Government’s economic stimulus plan, HAMP is an option that has yet to pick up a head of steam. It’s possible that it hasn’t gotten the necessary publicity, which is a shame, because keeping homeowners in their homes is vital not just to their well-being, but to the well-being of our economy.

Here’s how HAMP works:

Not a refinance, which replaces your loan with a brand-new mortgage, a loan modification happens when your lender reworks the terms of your existing loan. Generally speaking, this lowers payments and makes the home more affordable for you. Often, the lower payments are the result of a lower interest rate, an extension in the loan term, a reduction in principal, or any combination thereof.

If your home is your primary residence and the balance of your first mortgage is less than $729,750, then you may qualify for the program. Additionally, you’ll have to demonstrate that you’re facing hardships that are affecting your ability to make payments on your mortgage. From there, your lender will ask for documentation about your income, bank statements, as well as other financial data. You’ll also be asked to complete a Hardship Affidavit, in which you’ll describe extenuating circumstances with which you’re dealing.

“I’m doing just fine with my mortgage payments. Why is this important for me?”

Why? I’ll tell you why. The prospect of tens of thousands (yes, that many) homes suddenly appearing on the market is a pretty gruesome specter for our economy. Part of the problem of “shadow inventory” that we mentioned several weeks ago – a tidal wave of foreclosed homes entering the marketplace – would be a crushing blow to a real estate market that is only just showing signs of recovery.

Also, unoccupied homes are blights on communities. Too many can splinter a neighborhood, driving down everyone’s property values — not just those that are empty. And make no mistake: this isn’t just a problem of lower-income communities. No. Foreclosure is just as much of a problem in higher-end neighborhoods.

As Bloomberg reported late December – Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate. This brings the rate of default for these considerable loans up to a skyrocketing level of 12 percent as of September, compared with 6.3 percent on loans less than $250,000 and 7.4 percent on all U.S. mortgages. This is quite a jump from the year prior where the rate for default on the $1 million dollar plus mortgages as only 4.7 percent.

So, take a look at HAMP. HAMP is offering distressed homeowners a second chance. A chance to keep a roof over their family’s head. A chance to keep the sense of pride instilled by owning your own home.

It’s not a cure-all. But it’s a place to start.

By Gino Blefari
President and CEO
Intero Real Estate Services