This is important stuff for three reasons: First, HUD estimates that the 2010 GFE saves borrowers $700 per loan. Second, when a lender hands you a good faith estimate it’s a commitment to deliver a mortgage with certain terms and conditions once all application requirements have been met, say a 5 percent interest rate and not 6 percent by the time you get to closing. Third, you can check the lender’s promises at closing because the numbers from the GFE are used to complete the official settlement document, the HUD1.

In terms of graphics and layout the proposed CFPB forms — Prototype A and Prototype B — are well designed. There’s no doubt they’re easy to read and that they explain in plain language how a proposed mortgage will work. Kudos to the designers.

But while the CFPB has asked the public to comment on which design it prefers, the forms can easily be viewed as suggesting new and higher loan costs for borrowers — precisely what the new consumer bureau was designed to avoid. How? Not because of the form’s design characteristics but because of the numerical examples they illustrate.

Interest Caps

The model forms describe the terms for a 30-year ARM. The loan amount is $216,000, the start rate is 2.5 percent and the highest possible rate is 10 percent.

The forms also tell us that the interest rate can rise by as much as 3 percent after two years and 3 percent each year thereafter until the 10 percent maximum is reached.

These numbers are a gift to the worst lenders in America and describe a loan that’s simply awful. The government itself does not allow such terms for the mortgages it insures under the FHA and VA programs. Moreover, most private sector lenders — to their credit — do not demand such terms.

Most ARMs have a 2 percent annual interest rate cap and a 6 percent lifetime interest increase cap. To further clarify their terms, many ARMs also have an additional cap, a limit on the first adjustment after the start rate ends. Thus you might see an ARM with caps described as “2/6″ or “2/2/6.”

What the CFPB is describing is a 2/28 ARM with caps set at 3/3/7.5. In other words, the rate is fixed for the first two years of the loan term and then adjusts. Depending on rates at the time of the adjustment, the interest rate can rise or fall. In practice, the adjusted rate is likely to rise after the start because the initial interest level is deliberately set low to attract borrowers who might otherwise prefer a fixed-rate loan.

Why do lenders want to sell ARMs more than fixed-rate loans? Because the risk of inflation — higher interest rates — is shifted to the borrower.

So is it a big deal if the maximum rate can grow by 3 percent instead of 2 percent? You bet.

It’s possible, of course, that interest rates will not increase to the allowable maximums. However, the risk to borrowers if rates increase is enormous, especially in an environment where household incomes have been falling. Here’s why:

With the 2-percent increase annual costs can rise by as much as $2,716. If the maximum increase is 3 percent then the annual loan cost can grow by as much as $4,200. The larger increase can be as much as $1,484 per more year higher than the 2 percent standard.

Are these big increases? In many households the answer is yes. Are these increases large enough to lead to foreclosure? Unfortunately, in many households the answer will again be yes.

The situation, of course, can get decidedly worse. In year four the “better” loan can have another 2 percent increase and a third 2 percent increase in year five. That means the highest rate can grow to 8.5 percent in this example. For the loan that allows the 3 percent increase, the rate can grow to 8.5 percent in year four and 10 percent in year five, the lifetime cap.

The CFPB is on the right track. Consumer representation is a great concept, it’s long overdue and the Bureau is also new and untried. The Bureau will make mistakes. Big deal. Let’s have some perspective: The failure of existing regulators to adequately police lenders virtually bankrupted the country.

The CFPB is asking for public input, so why not do what existing regulators do and pay for a few hours of outside help?

Oh, and more thing, the forms have still another flaw. A huge flaw. But that’s a matter for another conversation.

Are ARM mortgage interest rates about to rise? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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FHA-backed mortgages are now a huge part of the financing landscape, but since April the up-front mortgage insurance premium has been 2.25 percent for most FHA borrowers. Now there’s some discussion regarding the idea of a 1 percent up-front MIP — but a higher annual MIP, a charge that would go from .55 percent now to .90 percent for most FHA borrowers.

A revised MIP schedule would lower the cash needed to close an FHA mortgage — but increase monthly cash costs.

It seems difficult to imagine that the up-front mortgage insurance premium (MIP) will soon be reduced given the rising claims and payouts faced by all mortgage insurance plans, including the FHA. That said, such a reduction is not outside the realm of possibility.

How do we know? It’s what the FHA is telling Congress. No less important, the math favoring such a change is entirely plausible.

Speaking before the Senate Appropriations Subcommittee on Transportation, Housing and Urban Development, and Related Agencies last week, FHA Commissioner David H. Stevens said that “while HUD is moving to increase the upfront premium to 225 basis points we are ultimately planning to reduce that premium to 100 basis points, offset by a proposed increase in the annual premium to 85 basis points for loans with loan-to-value ratios (LTV) up to and including 95 percent and to 90 basis points for LTVs above 95 percent.”

Back-Loading Fees

The FHA mortgage program has to have premium money for reserves so it can pay lender claims in case borrowers default. At the same time the FHA wants to get more people into homeownership. One of the best ways to make homes more affordable is to reduce up-front costs. In the case of the FHA mortgage program that’s done by requiring 3.5 percent down instead of the 5 percent to 20 percent required for most other mortgages– but the down payment is not the whole story. There are also costs for closing and that pesky up-front mortgage insurance premium which was raised from 1.5 percent to 2.25 percent as of April 5th.

HUD has moved to cut financing costs by $700 per transaction through the use of its new good faith estimate and HUD-1 forms. If it also can cut the FHA up-front MIP the settlement savings per transaction would be significant.

More Marketplace Volume

The move toward lower up-front costs could make it easier for first-time buyers to enter the marketplace. That’s important because the National Association of Realtors says first-timers represent 40 percent of all purchasers. You need first-time buyers so owners can sell current residences and purchase replacement properties. At the same time, the FHA reserves would actually grow over time. Here’s why.

The FHA has both an up-front mortgage insurance premium AND an annual mortgage insurance premium. The annual MIP is now .55 percent of the loan balance for most borrowers. If the annual mortgage insurance premium is raised from .55 percent to .90 percent then the FHA will see an increase in premium revenue that looks like this:

A home is sold for $300,000. the FHA loan amount is $289.500. In year one, if the annual MIP is .55 percent, the borrower is paying roughly $1,592.25 per year or $132.69 per month for FHA insurance. If the annual MIP is raised to .90 percent the monthly payment will be $217.13 ($2,605.50 divided by 12). The annual increase is $1,013.25 in year one. (All numbers are approximate because the loan balance is reduced each month as a result of amortization.)

The up-front MIP in our example was reduced from 2.25 percent to 1 percent. In this example the cash required at closing fell from $6,513.75 to $2,895 — a difference of $3,618.75. If the FHA will now collect an extra $1,013.25 in the first year of the loan and it will only take about 3.6 years to bring in as much cash as the old system.

Affordability

While the idea of a lower up-front insurance premium for FHA borrowers is attractive, not all loan applicants would benefit. Although a smaller up-front MIP would encourage homeownership, the new and higher annual MIP would make homes less affordable. Buyers would need more income to qualify for financing because monthly costs under the new plan would be higher. The tougher affordability standard would off-set some of the increased volume represented by lower up-front costs, a consideration not to be ignored.

Is The FHA Moving Toward 1% Up-Front Insurance Premiums? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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For the moment and most-likely for a long time to come the answer is no. The problem is not one of technology — if you can order everything from shoes to software online then why not closing papers? — instead the barriers involve conflicting interests and long-time legal standings.

As an example, the HUD has announced that it would accept electronic signatures for FHA loans “on third party documents included in the case binder for mortgage insurance endorsement.”

Okay, so what’s a third-party document?

“Third party documents, says HUD, “are those that are originated and signed outside of the mortgagee’s control, such as a sales contract. An indication of the electronic signature and date should be clearly visible when viewed electronically and in a paper copy of the electronically signed document. Mortgagees must employ the same level of care and due diligence with electronically signed documents that they would for paper documents with ‘wet’ or ink signatures.”

Notice that HUD does NOT include a number of core documents where electronic signatures are permissible. According to HUD, mortgage documents — including the mortgage note — must have regular signatures. Also, the HUD-1 and the sale agreement must be signed by humans.

The reason electronic signatures are not allowed for mortgage documents is that they were created by the lender are the lender is not a third party.

Barriers

Okay, why not allow electronic signatures for all real estate paperwork?

The reason is to assure with total certainty that the buyer and seller really and truly saw the documents they signed, had an opportunity to read them and that no one other than the buyer and the seller signed the HUD-1, the sale agreement or the mortgage note — the central papers of most real estate transactions.

Will this change in the future? Not soon. The reason is that many different parties to the transaction — the buyer, seller, closing agent, lender and others all want documents with original signatures. So while some paperwork can be done electronically, some cannot.

For the latest information speak with local brokers, attorneys and closing agents in your community.

Can We Have A Paperless Real Estate Closing? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The original HUD-1 was developed as a by-product of the Real Estate Settlement and Procedures Act of 1974 — or, as it’s usually called, RESPA. Prior to 1974 settlement forms could be different, meaning that it was very difficult to compare costs or to know what was deductible for tax purposes in the year of the transaction.

So what do we get after 36 years? The new HUD-1 is a vast improvement over the old model. It’s three letter-sized pages long rather than two legal pages, but there’s much more information in the new HUD-1. Buried in the form is an accounting of closing costs and perhaps even some write-offs. Buyers will find the full and complete cost of buying real estate while sellers will see how much cash (if any) they’re getting from the transaction.

Page One

The first page of the form is a summary of the transaction. In effect, it translates the sales contract between buyers and sellers into hard numbers.

At the top of the form we first have administrative data such as:

• The type of loan (conventional, VA, FHA, etc.).
• The place and date of settlement (the date can be very important for tax purposes).
• The mortgage insurance case number (important if you’re ever facing foreclosure).
• The street address of the property. This is a concern because for great clarity and assurance the form would be better if it also included the legal address of the property.
• The name of the settlement (or closing) agent. The party that conducts the settlement is typically regarded as an agent of the settlement process. In other words, they do not represent you.

Page One, Buyer’s Side

The HUD-1 shows transaction costs for both buyers and sellers — you get to see what the other person’s information. More important you get to see your own.

On the right side of the first page we have buyer costs grouped by sections.

Section 100 — This is where buyers see the cost of the property and the cost of settlement (the figure found on line 1400). Combine the two and you get the gross amount — but not the final amount — due from the purchaser.

Notice that there can be some adjustments in this section. For instance, it may be that the seller has paid local property taxes in advance — those payments would be a credit to the seller and a cost at closing to the buyer.

Section 200 — As a buyer you may have certain credits to offset your gross costs. Credits include such things as your deposit, your new loan (for closing purposes the mortgage is a credit to the borrower because it represents money brought into closing) and any additional financing.

In the 200 section you can also see adjustments which are a credit to the buyer. For instance, maybe the seller still owes some property taxes.

Section 300 — This is a re-cap of all costs and credits. If you take the gross amount due from borrower (line 120) and subtract the buyer’s credits and cash you then get the total cash due to — or from — the borrower.

Most buyers, of course, will need to bring “cash” to settlement. By “cash” what most settlement agents really want is a certified check or a cashier’s check. Also, it may be possible to wire funds to the closing agent. Always ask the settlement provider well in advance of closing how payment can be made.

Gifts: To assure lenders that you are not somehow getting a secret loan from someone, it’s best to have closing funds in your name and on deposit for at least 90 days. If you are getting a gift to close, ask your lender how the gift is to be documented and precisely follow the lender’s instructions.

Page One, Seller’s Side

Settlement is a moment of truth for owners, the time when you find out exactly how much or how little you’re getting from your sale.

Section 400 — The sale price of the house, plus the cash paid for any personal items, are shown here as credits to the owner.

Also in this section are adjustments — credits for property taxes and other costs paid in advance.

Section 500 — If any mortgage debt remains unpaid it shows up here as a cost to the seller. Also, the costs of closing (line 1400) are here as a deduction as well as any adjustments for such costs as unpaid property taxes.

Section 600 — If we take the gross amount due to seller (line 420) and subtract the seller’s closing costs (line 520) we can then see how much cash the owner will get from closing (or, how much cash is needed to close if the seller is upside-down).

Practices around the country regarding cash to owners at closing vary. In some areas there are “wet” settlements where the owner gets a check at closing, in other areas there are “dry” closings where it takes a few days to get a check because it takes time for the lender to fund the transaction and paperwork to be recorded. In some jurisdictions there are rules requiring the disbursement of cash with a few days. For specifics, speak with your settlement agent.

Page Two

On the second page of the new HUD-1 we have a series of sections which show costs that may be paid by either buyers or sellers — or split between them. In other words, these are costs which can be negotiated when a sale offer is made. For instance, in a slow market a seller might agree to pay all transfer taxes. In a hot market, the buyer might pay.

Section 700 — If one or more real estate brokers are involved in the transaction, this section will show the compensation to each broker and the cost, if any, to buyers and sellers.

Section 800 — Getting a mortgage is hardly free. When the buyer applied for financing the lender provided a Good Faith Estimate of Closing Costs (GFE) on the new form developed by HUD. This section shows such costs as points, origination charges, appraisal fee, credit report and tax service. Borrowers should check the numbers at closing with the estimates provided in the GFE. The costs shown on lines 801 (origination charge), 802 (points), and 803 (adjusted origination fee) must be the same as the GFE.

Please see our guide to the new Good Faith Estimate form to see how it’s coordinated with the equally-new HUD-1.

Section 900 — Closing is scheduled at a time which is mutually-agreeable to the buyer and seller. That time, however, will mean that for such items as interest, mortgage insurance premiums and homeowner’s insurance there will likely be a need to make some payments for daily costs in advance until the next billing period.

Section 1000 — If you purchase a home with less that 20 percent down the lender will likely require that you pay additional amounts each month for property taxes and insurance. This money is held in an escrow or trust account and then paid out as the bills come due.

If you will have an escrow account then the lender will typically collect money in advance from borrowers to assure that the escrow account is properly funded.

Section 1100 — As part of the buying process, sellers typically promise to deliver good, marketable and insurable title — and buyers should want nothing less. This section shows the costs for title insurance — both lender’s and owner’s coverage.

Lender’s cover — which is required by lenders if you finance the purchase — protects you up to the remaining loan balance in the event of a title claim. In other words, it protects the lender.

Owner’s coverage protects you if there is a title claim up to the purchase price of the property — in other words the loan amount plus your equity. Be aware that some title insurance policies have an inflation rider so that the value of the coverage can actually increase over time. For specifics, speak with your title agent.

Also, take a look at line 1107. This shows the commission paid to the settlement agent for providing title insurance.

Section 1200 — This is where you can see how much state and local governments are getting from the transaction. Governments are elated when homes are sold because such transactions are a major source of revenue. Government taxes can includes such things as deeds, releases, transfer taxes, state taxes, stamps, etc. Call it what you will, a tax is a tax.

Section 1300 — This is where you can find additional settlement costs.

Section 1400 — The total costs to close — this number also appears on lines 103 and 502 on the first page.

Page Three

The third page of the new HUD-1 is partially a confirmation that the costs outlined in the Good Faith Estimate are what you’re actually paying — or pretty close.

Some quoted costs on the GFE cannot be changed, some can be changed as much as 10 percent and some can simply change with the winds.

Also shown on page three is a recap of your loan including the mortgage amount, interest rate, loan term, ARM-related terms (if any), prepayment penalties (if any), balloon payments built into the loan (if any) and related matters.

IMPORTANT: Always keep your closing papers in a safe place for tax reasons and to assure that your loan terms are actually the same as disclosed on the HUD-1. For questions regarding closing issues, speak with your real estate broker, mortgage lender and closing agent. Be aware that some costs found on a HUD-1 may be tax deductible — for specifics speak with a tax professional.

How To Read The HUD-1 is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Until this point HUD has generally allowed lenders to offer their own Good Faith Estimate of Closing Costs, however the new standard form for all lenders — a form that took 14 years to develop — will finally assure that borrowers actually understand what’s being charged for their loans, why and by whom.

“The mortgage crisis,” says former HUD Secretary Steve Preston, the last HUD secretary appointed by President Bush, “was fueled in part by people agreeing to mortgages that they ultimately could not afford. In some cases, people didn’t understand or know that their mortgages could result in large payment increases after just two or three years. Others did not recognize the total costs that come with homeownership. And others paid higher loan origination and closing costs simply because they did not know about other affordable options.”

So what makes this form better?

First, it’s a three-page document that every lender will have to use — meaning that offers from lenders will be the same and can readily be compared.

Second, the document is not just a list of fees and charges, it also explains in basic terms the purpose of each expense.

Third, mortgage brokers will have to show their yield-spread premiums (YSPs), costs which Preston says were “rarely understood by, or fully disclosed to, borrowers. These premiums are directly tied to the higher interest rates that borrowers pay. Consumers deserve to understand this and they need to get credit for essentially paying these premiums.”

Page One

The first page is actually a summary of loan costs — the specifics are found on page two.

Item 1 tells you how long the quoted rate and terms last. Items 3 and 4 concern loan lock-ins — how long the rates and terms will last if you lock them in at the time the GFE is issued.

The loan summary tells you the amount of the loan, the initial loan rate and monthly payment. IMPORTANT: If you have an ARM the next few items will tell you:

• How high the interest rate can go.
• When the interest rate can first rise.
• The maximum monthly payment you can expect.
• If a prepayment penalty is allowed and, if yes, how much it will cost.
• Whether there is a balloon payment at the end of the loan terms.

Next the form will tell you whether the lender will create an escrow or “trust” account to collect money each month for property taxes and insurance. Generally, if you buy with less than 20 percent down an escrow account is required by the lender.

Finally, the form adds your origination charges (the “A” items on page two) with other settlement costs (the “B” items on page two). Be aware that you can have additional costs at closing, depending on how the sale agreement is written.

Page Two

The second page is divided into two parts, A and B. Part A looks at “origination” fees, the cost to buy your mortgage.

First, the form shows your origination fee in a dollar amount, including any yield spread premium (YSP). Under the old rules, the yield spread premium could be shown as either a dollar amount or as a percentage of the loan. Now, the entire cost of the loan, including any YSP, is shown as a single dollar amount.

Next, the form shows if your interest rate is being impacted by the origination fee. In other words, let’s say you can borrow $100,000 at 6 percent interest over 30 years with no points. This is called the par pricing for this loan. But, let’s say that you could also borrow $100,000 at 5.75 percent — if you were willing to pay 1 point at closing. A point is equal to 1 percent of the loan amount or $1,000 in this case. The form shows if you are paying for any reduction of the interest rate OR any increase in the rate by paying a smaller origination fee.

Next we go to part B. This part of the form shows the cash costs you can expect to pay at settlement (or escrow) when the loan closes. As the bottom of part B is a total which shows “Your Charges for All Other Settlement Services.”

The totals for parts A and B are then shown at the bottom of the page and on the bottom of page one as well.

HUD encountered considerable opposition from the lending industry, especially with regard to the question of how yield spread premiums should be disclosed. In an important decision which reviewed 14 years of effort to update the good faith form, a court found in 2009 that HUD had acted fairly and in the public interest with the form it produced.

Page Three

The last page should really be the first page because it contains instructions for understanding the form.

The first section lists charges that the lender cannot increase, charges that can rise by as much as 10 percent, and charges that change prior to settlement. This is important information, it means that you should check the numbers on your good faith estimate with the final figures presented to you at closing.

Next, HUD gets into the issue of higher or lower settlement fees. In the same way that mortgage loans have par pricing, so does the settlement process. In other words, if you are willing to pay a somewhat higher interest rate you may be able to lower your cash costs at closing. Indeed, you may not have to bring any cash to closing.

In the third section HUD offers borrowers the opportunity to compare loan offers from different lenders. This is important because borrowers should look at different loan offers to find the rates and terms which best meet your needs.

Lastly, HUD notes that your loan may be sold in the future. If so, after settlement “any fees lenders receive in the future cannot change the loan you receive or the charges you paid at settlement.” Translation: A contract is a contract.

HUD estimates that the new form will save typical borrowers $700 each time they finance or refinance a home. That’s a lot of money, but more could be done to cut borrower costs — and it shouldn’t take 14 years to make additional changes.

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Copyright 2009 Peter G. Miller. All Rights Reserved. Use of this material without permission is illegal, however direct links to this page are welcome.

How To Read The New Good Faith Estimate Forms is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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