SANTA CRUZ (January 16, 2010) - The U.S. Department of Housing and Urban Development (HUD) has just put into play new disclosures for the mortgage industry that are supposed to help borrowers save money and understand the cost of obtaining a mortgage. These new guidelines took effect on January 1 and come under the Real Estate Settlement and Practices Act (RESPA) and, upon first use, are causing more confusion than explanation and will probably end up costing borrowers more money and will certainly require escrows to take longer. These are dramatic changes and are said to be the most significant the mortgage industry has experienced in 20 years!

The ‘old’ Good Faith Estimate (GFE) used to be prepared for borrowers to give them a good idea of what their closing costs will be, how much cash they will need to close escrow and the monthly cost of homeownership. Borrowers were required to acknowledge receipt of the GFE by signing it and returning it to the lender. The GFE would typically be presented to the prospective borrower at the first appointment with a lender.

The current rules trigger a GFE when at least six pieces of information are received by the lender. They are the borrower’s name, SSN to obtain a credit report, income, address, estimate of property value and the loan amount sought. The rules also state that a lender may add any other reasonable information they deem necessary. Some lenders require a ratified Purchase Contract before a GFE is sent. There is a significant amount of information in the contract that assists the lender in preparing an accurate GFE. The appraisal cannot be ordered until receipt of the GFE has been acknowledged by the borrower and since the borrowers are not allowed to sign the GFE, the borrower must sign a separate document acknowledging receipt of the GFE (via email is quicker and, therefore, preferable) and a statement stating their “intent to proceed” with the lender. The appraisal cannot be ordered until these statements are returned to the lender based on the loan disclosed in the GFE. Once the formal GFE is presented to the borrower, the lender may not make any changes in their fees unless the loan amount changes.

Once a purchase contract is agreed upon by both buyer and seller, any other changes will require a new set of disclosures. To the public these changes may not seem like a big deal but for those of us in the business of helping buyers and sellers buy a home, it represents a big change and a potential for substantially increasing the time it takes for escrow to close. For example, even though sellers typically pay the Transfer Tax in Santa Cruz County (which is based on the purchase price), lenders must disclose this tax as a cost to the borrower and that amount must be exact, not an estimate. If the purchase price changes during the escrow, the lender must complete a form documenting the “Changed Circumstance” and re-disclose the change in tax amount to the borrower even though the seller may be paying the cost! It will take time to send, receive and acknowledge each change.

Aware Realtors will be taking special care to write purchase contracts that will allow the additional turn times that these new regulations will require. Escrows should be written for a minimum of 45 days and if the purchase contract calls for any inspections, the lender is required to provide a list of vendors and fees for those inspections. The California Association of Realtors (CAR) will be modifying the purchase contract that virtually every home purchase transaction in the state of California utilizes and we are recommending it extends the timeframes to accommodate these new regulations.

As I mentioned, the new rules are intended to help the borrower, which they may do. However, there is bound to be confusion as the new GFE form lacks the detail the borrower will want to know and should know. For example, the old GFE details the amount of cash a borrower will need to close the transaction and also details the monthly cost of the home – principal &interest payment, mortgage insurance when applicable, property taxes and homeowners insurance. The new GFE form does not provide that information. A summary of charges is on the new GFE and now some fees that the seller will typically pay (it is customary in Santa Cruz County for the seller to pay 50% of the escrow fee & CLTA and 100% of the transfer tax) must be disclosed as a borrower cost. Borrowers must then refer to their Purchase Contract to know what portion of those fees the seller will pay. Additionally, there is no place to state the amount of a credit that the seller is giving to the buyer to help pay the buyer’s closing costs. The buyer/borrower will need to combine the information in the contract and the GFE to know the true details of the transaction. An experienced mortgage professional will be able to fill in the gaps, but no longer will all that pertinent information be on one form.

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.