- - Friday, July 20, 2012

I read a short article in the newspaper last week about the Consumer Financial Protection Bureau’s desire to make mortgage disclosures easier to understand.

“When making what is likely the biggest purchase of their life, consumers should be looking at paperwork that clearly lays out the terms of the deal,” said CFPB Director Richard Cordray in a statement.

The 2010 Dodd-Frank Act eliminated what I think was an excellently designed one-page Good Faith Estimate (GFE) and replaced it with a complex four-page document that confuses industry experts and consumers alike.

Luckily, the old GFE, now called the Closing Cost Worksheet, is available through any professional mortgage-processing software. The Closing Cost Worksheet is not required to be disclosed or signed as proof of acknowledgment. Ironically, it is the only form I review in detail with each and every one of my clients. Let me try to compare and contrast some features of the old GFE and the new one.

The old GFE includes a separate box labeled Estimated Closing Costs that lists all charges associated with obtaining the loan, plus one-time fees that apply to an all-cash purchase of a home. For example, this box would include items such as a lender underwriting fee and a credit report fee that would not exist in an all-cash deal. It also would include the county transfer taxes that would apply in either a mortgaged or all-cash transaction.

The old GFE appropriately includes a separate box that outlines “prepaid items.” These items typically encompass interim interest and escrow deposits for taxes and insurance. They are separated from the closing costs because they are not one-time charges. As soon as a loan is made, interest is charged until the loan is paid in full. Likewise, as soon as a property is purchased, property taxes must be paid by the owner until the property is sold.

The difference between closing costs and prepaid items is better illustrated when a homeowner refinances. During a refinance, the charges in the closing-cost box do not exist if the borrower does not refinance. However, the prepaid items are paid eventually, regardless of whether the borrower refinances. As long as he has an outstanding mortgage, interest must be paid. And as long as he owns a home, he must pay property taxes.

Perhaps this is my biggest gripe with the new GFE. It puts all transactional costs, interim interest and escrow deposits in one big box and defines the sum of all those items as Total Estimated Settlement Charges.

Can somebody give me a sensible answer to the following question?

On a refinance transaction, how can a deposit made for a future real estate tax payment be considered a settlement charge? The answer is that it’s not a charge. It’s a deposit for a future payment to be made whether or not the borrower refinances. And in almost all cases, the borrower receives an escrow-account refund from his old lender after the old loan is paid off.

The new GFE gives the borrower a distorted impression of the actual closing costs of the transaction by making them appear to be much more than they really are.

I welcome Mr. Cordray’s efforts to revise the exceedingly overthought new GFE. What he should do is go back to the old GFE, which itemizes all transactional costs; separates them from the prepaids; states the interest rate, type of loan, monthly payment and loan amount; and finally summarizes the calculations that will be on the settlement statement so the borrower knows how much money he needs.

* Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.

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