Posts Tagged Good Faith Estimate

Another Good Faith Estimate

The Consumer Protection Bureau is thinking about overhauling the Good Faith Estimate they introduced just 18 months ago because even that seem too difficult for most to understand. Heck, it’s been a year-and-a-half and I’m just starting to like it and understand what the CPB was trying to get at with GFE2010. Of course it takes the government to take a 1 page Good Faith Estimate form and turn it into a 3 page document.

According to a survey conducted by ING Direct consumers polled about the new GFE had this to say:

  • More than one in three (36 percent) homeowners described the GFE as being “complicated” or a “waste of time.”
  • 68 percent of homeowners surveyed were unable to correctly identify the purpose of the “Title Services” charge on the GFE. In other words they didn’t know what they were paying for.
  • 53 percent of homeowners spent 30 minutes or less reading and reviewing the GFE.
  • One in ten (11 percent) homeowners never even looked at the document their loan officer sent them.

As a loan officer the things I get asked the most are:

  1. What is my interest rate?
  2. What is my payment?
  3. How much cash do I have to bring to the closing?

#3 is not addressed on the current GFE2010 or either of the two new documents being proposed. #3 is VERY important also. In many purchase transactions the seller pays all of the borrowers closing costs so all the borrower needs to bring to the closing table is their down payment. It would be good to know that, huh? I usually end-up sending the “Fees Worksheet” (the old Good Faith Estimate) along with the GFE2010 because it addresses all the above and breaks the fees out into easier to understand terms than the new one.

Unlike last time though, this time the CPB is asking our opinion on what is easiest to understand and what we’d like to see. Check-out the two finalist forms in PDF format then vote for the one that makes most sense to you. You can also add notes after you vote if you feel the form is missing some information you feel is important to the loan disclosure and shopping process.

See the new forms here:

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Financial reform means changes for the consumer, but business as usual for Wall Street

With the Senate passing another bill on Thursday that none of them have ever read and was drafted by the congressional staffers the question raised is “How is this going to affect my ability to refinance or buy a home?”  Well, below is a great summarized version of the bill via Mortgage News Daily via Mortgage Bankers Association (I know, it’s the long way around but it’s the best summary of 2,000 pages of wasted paper I could find).

In reality it doesn’t do anything the industry isn’t already doing to police itself. But, Congress makes it sound revolutionary.  There are some areas that are left rather vague though, and are open to interpretation. One being how a loan officer is compensated. The real issue here is that this bill addresses how mortgage broker‘s are compensated but does not address how loan officers at banks are compensated, which is the same way just with different terminology.

Right now an independent mortgage loan officer has to disclose all his or her compensation and how they arrived at that figure. The loan officer at a bank or credit union does not.  So be very careful when comparing the Good Faith Estimates between sources when shopping. They are all the same in theory, but how they are presented are different and actually makes it look like the broker isn’t being competitive when in reality the broker may be a better deal.  Being a small businessman, independent loan officers need to be competitive to feed their families.

Another issue at hand is with the vague wording of the bill regarding Yield Spread Premium (YSP): the “gross profit” or spread between par rate and the rate you are being quoted. To understand YSP think of the price Best Buy pays for a camera and then the price they sell you, the difference being what Best Buy makes. The lender or bank has a built in profit margin for each 0.125% increase in interest rate between the par rate and the rate you are being given, and this profit is higher for selling a higher rate up to a point, usually 3% max.

By the way, loan officers at banks have this also, internally they just call it by different names and the financial reform bill doesn’t address it.

Some would say (as Congress has) that this causes the loan officer to sell the borrower on a higher interest rate, and it could, but then if the borrower was shopping around the loan officer wouldn’t be competitive and the borrower would go with someone with a lower rate. Just like if you were buying a camera and F.Y.E. had a lower price than Best Buy, you’d buy it from F.Y.E.

But YSP doesn’t always mean more compensation for the loan officer. Many times the loan officer uses the YSP to cover some or all of the borrower’s closing costs, such as in the case of “no cost refinances”. Or when surprises come-up at closing on your new home or refinancing the loan officer issues a “borrower credit” to cover those surprises so the borrower doesn’t have to come-up with money out of pocket that they didn’t expect.

And this is an important point. With the new RESPA rules (Real Estate Settlement Protection Act) and Good Faith Estimate, what you are quoted is pretty much what it is.

So the possible elimination of YSP could in fact cost you more money because it would also eliminate “no cost refinances” as well as you, the borrower, will have to pay for those little surprises at closing. I know, some of you are saying “I’ve never had any little surprises at closing”, but believe me there were, they were just taken care of from your loan officer’s compensation behind the scenes and you never even knew about them.

And those of you who have had surprises you had to pay for, I’ll be that loan officer is now out of the industry. Just like any business, those that deal honestly retain customers and survive and those that don’t eventually run-out of people to burn.

In short, in my opinion the reform bill does a lot of nothing to really help the consumer while it will be business as usual on Wall Street on Monday. Of course, being drafted by shills for Wall Street (Dodd, Franks) and pitched by many of the same players that got us into this mess (Timothy Geithner who crafted the big bank bail-outs under Bush, Gary Gensler the former Goldman Sachs executive, Larry Summers the former hedge fund executive, and Jack Lew, former Citigroup executive) you can see why nothing really changed that could prevent such a meltdown in the future.

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