- The Washington Times - Wednesday, July 2, 2003

Most of us have experienced sticker shock at one time or another, from those little extras loaded onto that new car to the surprising total at the end of the register tape from your local music store. Did those CDs really cost that much?

What happens when the shock comes just when you are getting ready to purchase your new home?

“Settlement is the last place people need sticker shock,” says Brian Sullivan, spokesman at the U.S. Department of Housing and Urban Development (HUD). “You can look at a loss of thousands of dollars.”

It’s the old bait-and-switch technique. The broker brings in prospective clients with low numbers that suddenly turn into high ones just when you’re ready to close. The actual costs may have been “puffed up” with junk fees — a little here, a little there. Together, they add up to that unpleasant feeling in the pit of your stomach.

What about the Good Faith Estimate? Wasn’t that was supposed to take care of all that?

The Good Faith Estimate, a reckoning of interest rates, closing costs and a monthly payment breakdown, was designed in 1974 as part of the Real Estate Settlement Procedures Act (RESPA). RESPA bars kickbacks among settlement providers and forbids sellers from requiring the buyer to use a particular title company.

“RESPA says that the Good Faith Estimate should be as accurate as possible, but it is only an estimate,” says Ralph Dawson, vice president of RAM Financial Group in Largo and president-elect of the Maryland Association of Mortgage Brokers (MAMB).

What causes a Good Faith Estimate to change? Alterations can be reasonable, like an additional credit report, or they can involve substantive changes caused by a decrease in credit rating or an increase in points.

Suppose, for example, the mortgage provider disclosed a 1 point origination fee based on a conforming loan. Should the loan type change, with a conforming loan becoming a nonconforming loan, the mortgage provider might charge an additional point, but that, Mr. Dawson says, is grounds for another Good Faith Estimate.

“If there are substantive changes being made, they should do another Good Faith Estimate and finance agreement,” Mr. Dawson says.

At times, the actual monetary amount of a reasonable change and a substantive change is not all that different.

According to RESPA provisions, Good Faith Estimates must be delivered within three days of application. Anyone who applies for refinancing or a new mortgage is entitled to one. Because closing costs usually amount to 3 percent to 5 percent of the sale price, knowing a ballpark figure certainly would help consumers determine whether this home — or this package — is right for them.

The problem is that when you are talking about the purchase of a new home or the refinancing of an existing one, unanticipated changes to your Good Faith Estimate should be the least of your worries.

To make matters worse, no federal agency has the authority to prosecute and police violations. HUD can go after providers who pay referral fees to each other or those who compel use of a particular title company, but it can’t do anything when your Good Faith Estimate has suddenly ballooned to a couple thousand dollars more than the original.

That’s why HUD has proposed sweeping changes to RESPA. HUD says the proposals are in keeping with its mission to encourage homeownership and empower the consumer.

According to HUD, Americans spend $50 billion a year on closing costs but don’t always understand what they are paying for.

“The process is unclear, too complicated and too expensive,” Mr. Sullivan says.

The proposal on the table would have lenders abide by their original Good Faith Estimate with just a slight amount of wiggle room or dispense with it altogether by providing a guaranteed mortgage package agreement, a binding bottom line of closing costs.

Unlike the Good Faith Estimate, the binding bottom line of closing costs wouldn’t require the lender to itemize, nor would the lender be subject to RESPA injunctions against kickbacks.

That has some mortgage brokers worried.

“We go from full disclosure to no disclosure,” MAMB’s Mr. Dawson says. “No itemized disclosure would appear to simplify things for the consumer but make it more difficult to provide the quality of services that we offer.”

Complications arise, Mr. Dawson says, because the process of getting to settlement is not certain. There are costs lenders can’t control at the point of application.

Such a plan, however, would neutralize sticker shock.

“Just give people their costs,” says HUD’s Mr. Sullivan. “Don’t bait and switch.”

The HUD proposal also would allow for the bundling of settlement services. Today, because of RESPA provisions against kickbacks among settlement service providers, only the largest providers that can offer multiple services in-house can bundle the services together in a lower-cost package.

“Only the big boys can offer these packages,” Mr. Sullivan says. “We want to relax regulations so that everybody can compete.”

Mortgage brokers are not so sure that will happen. Such an allowance could significantly damage small business and yield power to lenders who could control who gets in on bundling deals and who doesn’t, they say.

“Brokers are small business entities,” Mr. Dawson says. “These changes will put us at a disadvantage in terms of competition. Bigger companies will be able to make up their losses. Smaller brokerage houses working with small profit margins may end up going under.”

HUD says that packaging will put the squeeze on settlement service providers to lower their rates.

“There is great room here for cost savings,” Mr. Sullivan says. “There are ways of doing business to lower costs.”

Another part of the HUD proposal concerns the Yield Spread Premium (YSP). Yield Spread Premiums are the markup of the lender’s interest rate. A buyer might qualify for a loan at a lower rate but agree to pay a higher rate to a broker who is offering a loan that includes payment of some of the closing costs, for example.

The difference between the rate for which you qualify and the actual rate is the yield spread.

The problem, HUD says, is that borrowers may not realize they qualify for the lower rate. HUD wants the YSP disclosed and credited toward the borrower’s settlement costs.

“The fact that the YSP is derived from the interest rate that you pay should be clearly disclosed in all circumstances to the borrower,” Mr. Sullivan says.

Yet mortgage brokers say that in trying to reduce closing costs they are receiving compensation from the lender rather than the consumer, and they are annoyed that they are the only industry that is subject to such close scrutiny.

“No other wholesaler has to disclose profit at the point of retail,” Mr. Dawson says. “Lenders don’t have to disclose where they got their earnings to borrowers.”

HUD estimates that consumers would save an average of $700 to $1,000 with the new plan. That’s up to $10 billion a year in the aggregate. HUD is in the process of refining its proposed rules based on public comment.

“It’s been nearly 30 years since RESPA,” Mr. Sullivan says. “The regulations that grew out of those times were designed for the 1970s. The way people buy and sell homes today is almost a world apart from the way things were then.”

So what can a consumer do?

Be educated, Mr. Dawson says. Know what you are up against.

“Regardless of what the rules are, any plan can be abused if not properly enforced,” he says. “A well-educated and informed consumer will know what’s going on.”

First of all, don’t sign anything before receiving your Good Faith Estimate. Get more than one so you can comparison-shop.

“Lots of banks have a ton of weird little fees outside of things like points,” says Bill Scott, a buyer agent for the Buyer Brokerage in Arlington (www.ihelpubuy.com). “You can negotiate something like an application fee or find another bank.”

While some costs, such as appraisals and credit report and recordation fees, may be fixed, other items can provide you with a needed bit of wiggle room, Mr. Scott says. You don’t always need things that have to get there overnight, so you can ask that those be sent by standard post rather than overnight or express mail. Because loan payments are due on the first of the month, you can reduce your prepaid interest by closing on or near the last day of the month. (Most Good Faith Estimates reckon by midmonth.) You can negotiate with the seller, who may be able to pay part of your closing costs.

Above all, be aware of those areas in your Good Faith Estimate that are most likely to change. Keep in contact with the title agent, who is the first to know when the actual fees differ from those provided on your Good Faith Estimate.

Hazard insurance premiums and property tax values are also liable to change unexpectedly. Talk to the insurance agent yourself to find out.

You even can make a trip to the county courthouse to learn property tax values.

Bottom line? Remember that it’s only an estimate.

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