Larry Bettag, an Illinois FHA specialist, wrote this great article on the new good faith estimate that is required for new loans.
It seems that like many government programs, the intent is good but the result is a mess. The end result is more confusion and a higher cost to the consumer.
I'm from the government and I'm here to help..... yeah right.
The New Good Faith Estimate is causing real pain to
The Consumer and;
The Real Estate Industry
I've now spent two months working on this new good faith estimate. It's been implemented since January 1rst of 2010. So, without further adieu.....what is the problem with the new Good Faith Estimate?
First, let's call it like it is. The government wanted to create a "new and improved" Good Faith Estimate that is "user friendly, easy to read, and would promote a fairness in comparison shopping for the consumer." The consumer would be able to shop one lender against the other with such clarity that the Obama administration fully believed that the consumer would get better, clearer information and that the consumer would save about $700 per transaction.
1 The new Good Faith Estimate (or GFE) is anything but clear. Fortunately lenders are using the initial fees worksheet in conjunction with the new GFE. The New GFE is three pages long and discloses EVERYTHING, EVEN IF IT DOESN'T APPLY TO THE BORROWER. For example, the lender needs to disclose the title insurance in a purchase transaction even though the buyer doesn't pay for it in Illinois, the seller does. The title insurance becomes a "cost" disclosed to a borrower....but it is not a cost incurred to the borrower. The same can be said with most transfer taxes in Illinois. State and County transfer taxes are paid by the seller. Some munipalties have transfer taxes as well. Needless to say, this
2) It is much more expensive for the consumer under the new Good Faith Estimate law for two reasons:
- There are different categories on the good faith estimate. If the lender makes a mistake in certain categories, the lender eats it 100%. There are other categories with variances, but let's say that a lender fails to disclose a transfer tax that is charged to the seller, the lender eats 100% of it. It could be $1,500 up to $3,500 dollars. With a mistake like that looming over every lender, a smart lender will charge an extra few dollars to absorb mistakes on the loans that they don't get it right;
- It's so much more difficult to get a loan done from start to close. Ridiculous really compared to what it was. Sure it should be tighter, but it's so tight that all a loan officer does is look for ways to make things more palatable. Slam dunks? Few and far between. With more to do, lenders are not goint to want to be paid less. They are closing less, but their family expenses having gone down one bit. The cost to manufacture a loan is the same as always. With less loans closed per loan officer, invariably the costs need to go up. I just reviewed a Good Faith Estimate on a no cost refinance from Bank of America where the charges are just over $12,000. Wow!
FREAKS THE CONSUMER OUT...
WHEN THEY SEE HIGHER CHARGES THAN THEY'RE ACTUALLY PAYING.
Currently, I have a borrower who is buying a home with zero down payment. Needless to say, I have to approve the borrower by verifying over $8,000 of funds, when, in fact, the borrower only needs about $3,500 dollars to bring to closing. Getting this borrower approved has been rough because the borrower has to now play a game and show more funds than they'll need at closing because the government wants it that way. Can I say...."Where is the Truth in our Lending" anymore?
This one is short and sweet. It basically cheapens our industry. The government has overcorrected for the actions of a few. The government should have prosecuted and punished those who were criminal. They didn't do so until there was a public outrage. Now, as a result, the government is punishing the industry, and, as a result the consumer who is supposed to benefit as a result of the new legislation.
Great loan officers will calculate for a borrower what he or she needs to bring to closing. If the good faith estimate is so far off, the loan officer will say,
"here's exactly what you'll need to bring to closing. "
"I know Mr. Borrower that the good faith estimate says our closing costs are X,Y and Z, but really they're not. You see that the seller's charges are on here. Transfer taxes are on here."
BORROWER: "Yeah, but your good faith says...blah, blah, blah."
Loan Officer "Just trust me."
Thus giving birth to the "Used Car Salesman"..."Just trust me"
Are you kidding me? We're supposed to be trusted advisors not sleazy used car salesmen. I'm not a used car salesman. But here's another conversation that I had with a realtor. I work with a Re/Max agent who is in the top 1% nationally.
Realtor: I got a call from Joe blow. He's confused on the fees.
Me: I know. I just got done meeting with him. I went through the good faith estimate and told him that the new government forms suck.
Realtor: Well he's concerned because it says that he needs to bring in $11,000 to closing.
Me: I know, but I calculated it out and he's really only bringing in just under $3,500. Blah, blah, blah.... (I'm now back to just trust me). GROSS!!!!
My trusted referral partner now has to hear the "pitch" from me, her 15 year partner in the business.
Normally I'd say that the Jury's still out, but in this case, the jury has returned, really quickly. The law has good intent, but the results? I'm sorry, but the results of this bill is a resounding guilty.
There are ways around showing the client the new Good Faith Estimate. I have spoken to folks who are legally getting around going through all the headaches of this bill. What they're doing is legal, but it' skirting the intent of the law. I guess my bottom line is this. Fix the bill before someone gets hurt. In this case the someone's are consumers, realtors and lenders....as well as our economy.
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