|
July 8, 2002
"I paid $2240 in lender fees when my
loan closed, compared to the $880 I was quoted at the time my rate was locked.
It was a total surprise that hit me at the closing table. With my house purchase
at stake, there was nothing I could do. This is outrageous�why doesn�t the
government do something about it?"
I share your outrage. Unfortunately, the
Federal Government is largely responsible for creating the problem in the first
place.
The "price" of a home loan has
three major components: the interest rate; points, which are an upfront charge
expressed as a percent of the loan; and lender fees which are dollar charges for
each of a number of lender services, such as processing, document preparation,
inspection, and so on.
Lender fees should be the least
troublesome component of the price. They are designed to cover the costs of
lending, which do not change much in the short term. Hence, there is no
legitimate reason why lenders can�t guarantee them when they quote a price to
the borrower. The guarantee could, and should, be a single dollar figure.
Borrowers don�t give a fig what the separate items are.
Rates and points, in contrast, are
market-driven, fluctuating from day to day in line with changes in capital
markets. Lenders can�t be expected to guarantee rates and points unless they
know that the borrower is committed as well. Otherwise, borrowers would close
with the lender from whom they have a price quote only when prices rise
following the quote; when prices decline, they would get a new quote from
another lender.
Yet the reality is exactly the reverse.
Lenders will lock the rate and points as soon as they have some reasonable
assurance that the borrowers will close with them. The lock usually occurs from
30 to 60 days before closing, unless the borrower elects to "float"
the terms in hope that prices will decline. But lender fees can change anytime, including
the day of closing.
How can that be? Thank the Real Estate
Settlement Procedures Act (RESPA), and the Good Faith Estimate (GFE) of
settlement costs, developed by HUD in administering that law. The GFE is
supposed to help borrowers shop knowledgeably for settlement cost services. In
practice, it provides legal sanction for lenders to cheat borrowers at the
closing table. It could not do this more effectively if it were deliberately
designed for that purpose.
The GFE sanctifies itemized pricing of lender
fees by providing space for any expense category a lender wishes to use, while
total lender charges are not shown anywhere. Further, as if to discourage
borrowers from calculating their own total, the GFE intermixes lender charges
with charges of third parties. Since the names of the various items mean little
or nothing to the typical borrower, only the most astute and determined can
figure out the total of lender charges.
The result is that the borrower is encouraged
to focus on the details of lender charges rather than the total,
which is the only
number they really need. I tire of the many letters I receive from borrowers who
ask "What is an endorsement fee (or a document review fee, or a funding
fee, etc)", and "Is this a reasonable charge?" These are
questions that should never be asked.
But it gets worse. All the numbers on the GFE
are "estimates", subject to change right through to closing. And there
are no penalties for under-estimates or omissions that are corrected at the
closing table.
The rationale for viewing the numbers on the
GFE as estimates is that lenders can�t be certain about some third-party
charges until late in the process. But the GFE gives them the right to change
not only third-partner charges, but also their own charges, which they do know
with certainty. This is a Government-sponsored invitation to abuse.
While most lenders don�t accept the
invitation, the GFE protects lender fees from competition. Lenders quote rates
and points, which is what borrowers shop for, but not fees. An exception is some
internet lenders, who publish their fees and guarantee them. They are listed
under Single-Lender
Web Sites.
HUD could fix this problem by redesigning the
GFE to show lender fees as a separate category, with a total that is guaranteed
by the lender. They could not do better than copy the format used by
mortgage.etrade.com.
Meanwhile, request a written list of lender
charges before submitting an application, and inform the broker or lender that
you expect it to be honored. In most cases, it will.
Copyright Jack Guttentag 2002
| 
