Help! The New Good Faith Estimate is Here

I’ve got bad news for you… If you are a borrower looking to know what your new mortgage loan is going to cost you, HUD just made it harder for you. The start of the New Year brought a new form that lenders are required to use. “Out with the old and in with the new” – welcome the new Good Faith Estimate.

So, you go to your local mortgage lender, broker or bank and ask for a Good Faith Estimate. Like most borrowers, you want to know what it’s going to cost you to get a loan; you’d like to know what your mortgage payment will be, how much money you could expect to need at closing, what your down payment will be, how your escrow account for property taxes and homeowners insurance will be handled, what costs the seller is going to pay, what costs the lender might pay on your behalf – you know, normal stuff. Furthermore, you want a place for signatures so you feel you have some form of guarantee. Well, don’t look to the new Good Faith Estimate for answers to any of these questions; HUD’s new form does not include them. It doesn’t even include a place for signatures, and HUD has forbidden lenders to put any of these items on “their” (HUD’s) new Good Faith Estimate.

Don’t get me wrong, something needed to be done. Unfortunately, something still needs to be done. There were and are too many lenders that do not disclose fees properly. Those lenders need to be held accountable, which shouldn’t be that difficult given the rules already in place. That said, the monstrosity that we now have is hurting the already battered real estate market. HUD itself has shown how bad this form is by having the necessity for weekly updates with lenders and an ever growing question and answer (FAQ’s) document; now standing at 57 pages as of Jan 28th 2010 – see here. Lenders have had to create entire new departments and legal departments to deal with this form. Lenders, who are ultimately responsible for ensuring accuracy amidst the changing winds and direction provided by HUD, are simply rejecting loans.

There are very few areas of this form that are accurate – even the historically accurate Truth In Lending (TIL) form has now been made useless by the new Good Faith Estimate, since the TIL calculates the annual percentage rate from the now inaccurate Good Faith Estimate. The Annual Percentage Rate (APR), which borrowers used to be able to use to compare the true cost of credit, will now vary between lenders as each lender’s legal department decides which costs should be included on the Good Faith Estimate – costs or fees that either don’t exist for the loan applied for or are not actually buyer fees.

Let me give just one example of the confusion that is being created by this new form. In Berwyn, Illinois (as is the case in many cities across the country), the city has a fee that is a seller cost; it’s called Transfer Stamps. This is not a cost that the buyer has to pay; it is a cost that is specifically charged to the seller of the property. In the past, this fee, rightfully, would never have been shown as a buyer cost and would never have been put on the Good Faith Estimate. Enter the new Good Faith Estimate, and this cost must now be disclosed as a cost to the buyer. Does that make sense to you? It certainly doesn’t to me! But the creators of the new Good Faith Estimate have designed a form where costs mandated by other forms of government on the seller, not the buyer, are shown as a buyer’s cost – this is just confusing and inaccurate; what a mess!

I believe that the Good Faith Estimate form, if changes are not enacted, will stay a required form, but will be seldom used by most borrowers. Instead, the Good Faith Estimate will be known as a “here are the types of fees associated with a loan; they may be paid by you, the lender, the seller or other party – they may not even apply to your loan” form.

The new Good Faith Estimate will force lenders to come up with a new form that will actually disclose the details of the transaction – a sort of “worksheet” or “details” form that will show what costs a borrower can expect to pay based on the loan they applied for. The form will also show if any of these costs are paid by the seller, lender or other party. The form will not include costs that are not typically a buyer’s costs. It will show the mortgage payment and will give the borrowers a true estimate of how much money is needed at closing. In short, it will estimate all of the financial details of a transaction for the borrower – but it won’t be called a Good Faith Estimate, because amongst other things, no other document may contain the words Good Faith Estimate, so say the creators of the new Good Faith Estimate.

So much more could be said…

Have questions or your own comments? Let me hear them below.