Reality Check: Good Faith Estimates

02.26.10

In a recent blog, I wrote about the problem in the mortgage appraisal process that Fannie Mae and Freddie Mac have mandated, the one that says that appraisals must be ordered through independent Appraisal Management Companies. That was introduced seven months ago. But a more sweeping change became effective on January 1, 2010.

This is a revision of two forms that are at the heart of the mortgage lending process. The first is the Good Faith Estimate of Closing Costs (GFE) that is supposed to be given to borrowers within three days of a mortgage loan application. The second form is the HUD-1 Closing Statement that is given to borrowers twice, an estimated HUD-1 just before and/or while they are signing their loan documents, and a Final HUD-1 after the transaction closes.

As a quick summary comment, this is what happens when government bureaucrats who actually do not know anything about the mortgage process and do not understand consumer behavior start fiddling with forms, under the assumption that consumers will be better protected. 

I will remind readers of a statement made on October 1, 1998, by then-Fed Chairman Alan Greenspan before a Congressional committee:

I know of no set of supervisory actions we can take that would keep people from making dumb mistakes. I know of no piece of legislation that can be passed by the Congress that would require us to prevent them from making dumb mistakes.

Yet, here we are 12 years later trying to create new rules, new regulations, new disclosures, and new forms that purport to help people, to keep them from making dumb mistakes. And the bureaucrats and legislators will never learn.

This newest iteration the new GFE is now three pages long, replacing the former one page form. Perhaps that is part of the government’s paperwork reduction program. These forms are complex enough that the government has created a guideline – a booklet that tells mortgage brokers, lenders, and escrow/title settlement agents how the forms are to be filled out. Simple? Hardly.

The booklet is 66 pages long. Not only that, but if you can’t figure it out in the booklet, the government has prepared a FAQ document to help answer Frequently Asked Questions. How long is it?  51 pages.

Now I am going to make this judgmental statement:

Any set of two interrelated forms that require over 117 pages of explanation cannot possibly help consumers achieve the intended purpose of better understanding the transaction, being better able to make choices of alternative terms, and being able to shop among various lenders for the package that best meets their needs.

The mortgage industry is so confused now that one lender reported to me that their “Set-up Department,” the folks who are supposed to assure compliance on incoming loans, is in a bottleneck and that loans are slow in being sent to underwriting. Production is at a snail’s pace.

A lender we do business with has not bothered to create one person in their organization who is in charge of compliance. Instead, the underwriter thinks that she knows the rules and won’t let an approved package go to the document drawing department until escrow provides her with an estimated HUD-1 statement that conforms to her understanding.

The document drawing person won’t send the documents until she approves the GFE that is prepared by another person in her company, and she has a different understanding about what is correct. The funder has an even different concept, and when she gets the signed documents back, she won’t fund the loan until that HUD-1 meets her understanding – and of course, that will likely be different that what the escrow officer thinks it is.

I asked an escrow officer about what was going on with the other transactions her company is working on. She said it was chaotic. The average transaction is closing ten days late.

If you are going to buy a home or refinance your home, you will have to deal with these forms and you ought to at least see them before the transaction. You don’t have to understand them; just be a little familiar with them. Click on the links to see the new GFE form the HUD-1 form. For guidance, I have also provided links to the aforementioned Instruction Booklet and the FAQ document. 

If that isn’t enough, huge Bank of America has prepared its own 7 page suggestion on how to complete the forms. Many loan charges are listed on line 801 of the HUD-1. On this form you can see the various charges that are supposed to be lumped together on that one line.

You will notice that conspicuously absent is a short booklet designed to guide consumers in understanding the forms. If that bothers you, I strongly suggest that after your transaction closes, you black out any sensitive personal data on your GFE and HUD-1 forms and send them to your Congressional representative and to both of your state’s senators along with a letter protesting the process. 

Maybe a few million such letters will convince those yahoos to go back to the drawing boards, and this time get a little help from people who have spent years dealing with customers and who have learned how to answer their questions.

Finally, harkening back to Mr. Greenspan’s comment, the way to keep people from making dumb mistakes is not through more laws, more regulations, and more forms. Rather, if consumers are well educated, they will protect themselves.