Guest article from Dave Hershman
www.webinars.originationpro.com

The Scoop on the New Good Faith Estimate

Starting January 1, HUD for the first time is requiring a Good Faith Estimate (GFE) which is a standardized government form.  The concept of a standardized form absolutely makes sense. In the past, it seems every mortgage company and LOS had their own form and this created more confusion in the industry because there was not a standard way to disclose closing costs.  Previously HUD had attempted to provide some guidance on this form with regard to typical origination fees and the yield spread premium by requiring that any fee which appeared on the HUD-1 (which was already a standardized form), must be numbered the same on the GFE.   Note that the RESPA changes also revise the HUD-1. The HUD-1 form will not be addressed within this article.

HUD has indicated that they will delay enforcement with regard to this form for the first few months, but it does not mean that the form is not required.  There was somewhat of an uprising because much of the industry was not ready even though they had a full year. It seems that the industry had many other things to worry about in 2008, such as the rules of FHA and other programs changing just about every other minute.

The idea of a standard form is a good one. There are other “good ideas” incorporated into the GFE. For example, it is supposed to be simplified.  It is also supposed to facilitate consumer shopping so that the net result of the form is to save the consumer money.   Some of these ideas will get implemented. Others, I am not so sure they will come to fruition.

First, let’s address the goal of simplification.  Only the government would take what was typically a one-page form and turn it into a three page form and call that “simplified.”  One page would be simple. Three pages is not.  What the government seems not to realize that they are piling these pages onto another 100 or so pages of forms the consumer must sign to get to settlement. More pages will not increase comprehension in this muddled environment.  

What is added?  For one thing, the GFE is now part “disclosure of closing costs” and part “disclosure of elements of the loan program.”  It talks about interest rates and monthly payments rising.  These are good things to disclose, mind you—but there are other disclosures that are meant to handle these. The loan program disclosure comes under the purview of the Federal Reserve Board pursuant to implementation of the Truth-in-Lending Act. This act requires a TIL disclosure and a specific adjustable rate booklet and disclosure when applicable.  So now the GFE is part TIL and GFE.  I will not oppose HUD’s encroachment here in that the TIL is the most inaccurate and hardest to understand form in the whole package. This is a subject for another time.

If you are going to have a multi-page GFE with program disclosure information, what about one that combines the TIL and any required loan disclosure (adjustables, balloons, temporary buydowns)?  Imagine the concept of having less forms!  Probably against a government mandate.  Going back to the GFE, talking about the possibility of rising rates without giving details on the adjustable (for example, the margin and index and how it might also fall)—is a very incomplete  and skewed picture.

The GFE has a very interesting element.  It has a tradeoff table which is apparently optional for the loan officer to fill out. It is optional, but I don’t think it should be treated as such. What are you going to tell a consumer—I decided not to give the information to you?  I have been teaching this method of comparing “no closing costs” versus “paying points” for decades. Once again it is an incomplete analysis but it is better than nothing. Why is it incomplete? Well it does not show that the most important part of the analysis is “how long the consumer will use the mortgage.”  That is the problem with TIL disclosure. It discloses all the costs as they would be spread out over life of the loan—usually 30 years. But we all know that the average life of a mortgage is much less than 30 years and therefore these costs are understated.

This GFE also leaves out some pretty important information (perhaps it should be four pages)…

1.    What cash does the consumer have to bring to settlement? The two most important items that a consumer is interested in when purchasing a home is how much cash to they have to bring to settlement and what is their full monthly payment.  Believe it or not, the GFE is missing both of these. The GFE does disclose what cash is necessary for origination charges, but it does not estimate total cash required which would be a function of down payment, credit for a deposit and even payoff on a refinance.  What is curious about this is that it appears the government tried to make the form more comprehensive in other ways.

2.    The full monthly payment including escrows.  Nothing is more important to a borrower.  Granted there is other relevant information such as what will the payment be in the future and even what is the payment after the effect of taxation. However, the bottom line is that the homeowner needs to know what is going to be required each month.  They don’t particularly care how much is for the loan or how much is for insurance (at tax time they will care).

3.    It is not clear how to handle FHA up-front mortgage insurance and the VA funding fee.  HUD instructs these charges to be listed in Block 3 of the form. However, since the fees are typically financed into the loan amount and not as a lender credit, they don’t add to the all-important cash needed at settlement. A solution would be to bracket this cost with a note regarding the status if it is not paid up-front.  I can’t see leaving it off these fees or adding them into the total cash required.  Of course, with FHA analyzing their program, the practice of financing the up-front MIP could change.

4.    There is no signature line to provide proof of receipt. HUD in their instructions allows the GFE to be delivered electronically but does not allow for the adding of signature lines. That is peculiar, since the lender will be responsible for demonstrating the GFE was delivered within three business days of application. How are they going to prove it?  I will tell you what most lenders will do. They will require a separate form that the homeowner signs to acknowledge receipt. Now we have added another form and two pages to the GFE as well.

With its questions and flaws, this form is coming.  That means you better learn it. This is exactly why I am giving a webinar through our Certified Mortgage Advisor Program, Understanding the New Good Faith Estimate, on Wednesday, December 16, 2009.  To register, go to www.webinars.originationpro.com.  As for me, I am hoping that HUD and the Fed get into a room and seriously consider consolidating, simplifying and eliminating forms so that the consumer has a chance to understand the home ownership process. 

Dave Hershman is the leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. You can start your participation in OriginationPro’s Certified Mortgage Advisor program for by visiting www.webinars.originationpro.com.  Dave's email is success@hershmangroup.com.