What is Up with the New Good Faith Estimate?
Posted On: February 4th, 2010 by James Posted In: Government Actions • Mortgage Programs
I have been biding my time on this topic. Waiting to see how this feels for clients and processing, before I shoot off with some knee jerk reaction to the new good faith estimate. This isn’t just a new document, its a drastically different document that performs a new function, in combination with some major RULE CHANGES. My knee jerk reaction has been all negative, so I didn’t want make a blog post until I gained some perspective. SO – now I’ve given this new document out to quite a few clients, and it really only makes things SLIGHTLY more confusing than it used to be, or needs to be, but I also think there are some good things about it. I will break this down in finer detail what I see are the good changes, and what I think are the crazy changes.
But first off I realize that we need to start at the right place. One thing that I think should be mentioned is that this new good faith estimate is no longer an estimate. So I feel that there would be less confusion if the government had just called it something else – like “your guaranteed loan costs”, or a “lender cost commitment”.
*** Click here to see an example and follow along with the GFE-2010 ***
Also, the new good faith estimate no longer performs the same function as it once did. The old document had a breakdown of all fees associated with the mortgage, as well as fees associated with the title and escrow process, plus the prepaid interest and up front taxes or mortgage insurance etc. The put all of these fees into neat columns, and also included a transaction summary that showed the borrower the purchase price (or loan payoff in a refinance). the new proposed loan with all fees and prepaids stacked in, to show a clear “final cash due at closing” figure. The new good faith estimate does NOT do this. The new good faith estimate lumps the loan fees into one block, and then it lumps the title and escrow and prepaid taxes and insurance fees into another box and calls that a separate fee. Nowhere in the new good faith estimate will you find either: 1. cash due from borrower or 2. estimated total monthly payment.
The only things the new good faith estimate show are about “loan cost” and “loan terms”.
Now to what I think are GOOD things about this new good faith estimate.
The first thing that I want to mention that has nothing to do with the actual document, but the new rule about how our fees are virtually guaranteed from application to closing. The loan fees are ABSOLUTE (unless a borrowing circumstance changes during the process). This is mostly good for borrowers. (I say mostly because I will circle back to this in my “what is crazy about the new GFE” section.) Although, I fear this rule has the potential to cause some anguish for all concerns in a purchase… more on that later. But I think the impulse is correct, the government is now protecting borrowers from shady bait and switch tactics that we’ve all been aware of in the marketplace for years… so this is GOOD.
I also like the “loan summary” section on page one of the new good faith (it is a 3 page document now). The loan summary clearly shows the rate, the loan term, and clear indications of any special features the loan might have. “can your interest rate change?… is there a prepayment penalty?… can my loan balance rise?” These are super important things for borrowers to be aware of as they proceed towards a loan funding. We’ve all heard stories about old retirees getting involved unwittingly in exotic loans and ruining their retirement years. This section will hopefully make it more difficult for borrowers to be led down a path into a product that has features they are unaware of.
Although – the main offender for these kinds of loan shenanigans “the option ARM” is a program that no longer exists in America. So – this change is about 3-4 years too late in my opinion. Our government is finally protecting us from something that no longer exists… CLASSIC!
What is CRAZY about the new GFE.
So, what I mentioned earlier about the rule changes, that force lenders to ABSOLUTELY honor their fee commitments, is both good and bad (crazy). Every good loan officer knows how important it is to set the right expectation with their clients with regard to the cost of the loan. Usually the fees in a good faith estimate do not change that much throughout the process. But sometimes borrowers change their minds about how much they want to borrow. For instance, if someone wanted to put 50% down on a home purchase, and the fees were set to match that loan amount, and the borrower then changes his mind to put down only 10%…. the lender CANNOT adjust the fees. Now, this isn’t the worst thing in the world, but I do think that there will be some fee inflation as a result of this rule. Lenders will estimate on the high side to protect themselves from future changes. For instance, what if the underwriter requires a second appraisal (becoming more and more common)?? Well, sorry loan officer guy, you will have to eat that. Anyway, this is something to keep an eye on. If the borrower changes loan programs, or properties, along the way, these are considered “changes in circumstance” and the terms can then change and be re-disclosed.
I also think it is crazy that the government is putting so much verbiage to the effect of “the most important thing you can do ever in the history of your life is shop for a mortgage”. We know that this is not true. The “cheapest” mortgage may in fact not close on time or close at all. Never in the history of my career (which is 7 years strong!) has it been more important or valuable to connect with an informed professional mortgage loan officer. There are SO many pitfalls in the approval process now.
Please take a look at a new short youtube video I have prepared that highlights my services, and in particular highlights how I manage the rate shopping process for my clients. I call it: How to get the best price on your mortgage
3 Responses
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James says:
Thanks Ken, your endorsement means a lot!
Great write-up on the new GFE! Your explanation really hit the nail on the head!