Law of unintended consequences in mortgage shopping

What if the federal government spent years designing a tool to help consumers shop intelligently for mortgages — comparing lenders’ rates, terms and total settlement costs — but consumers ignored it or didn’t use it?

No need to speculate here; it appears to have already happened. A new survey of 1,000 American consumers suggests that the “good-faith estimate” disclosures that all homebuyers and refinancers receive at loan application to facilitate shopping are not getting the job done.

Federally mandated good-faith estimates spell out the lender’s charges, all anticipated fees for title insurance, escrow and settlement services, plus other key costs. The most recent version of the GFE, released at the beginning of last year, contains space for consumers to take one lender’s estimates and get competing quotes from as many as three others. It also requires lenders to stand behind their estimates — guaranteeing that some of them won’t increase by even a penny at closing, and others won’t increase by more than 10 percent.

But the survey found that the GFE may not be improving shopping as intended. After receiving the disclosure, 56 percent of buyers say they did no comparison shopping among other lenders. Another 12 percent used the form to contact just one additional lender, and 10 percent weren’t sure whether they actually used the GFE at all. Just 3 percent said they comparison-shopped rates and terms at four lenders or more.

The survey, conducted by market research firm TNS Global for mortgage lender ING Direct, also found that 53 percent of those buyers who looked at the GFE spent less than 30 minutes doing so. Twenty-six percent either never looked at it or don’t know if they looked at it. Forty-nine percent of buyers said the GFE disclosure was too complicated, “a waste of time,” or they weren’t sure. Just 37 percent rated it “useful.” The survey had a statistical margin of error of plus or minus 3.2 percent.

Arkadi Kuhlmann, chief executive of ING Direct, called the GFE potentially “one of the most crucial documents a homebuyer [receives],” yet the survey indicates that currently it is not effective. “If it’s too complicated and not being used to help homeowners find the right mortgage for them,” he said, “then [it’s] just a waste of three pieces of paper.” Kuhlmann’s firm, which does the majority of its mortgage business online, directs its customers to an educational website it has created that walks them through the GFE step by step, explaining the process in terms that are easy to understand.

Between 2003 and 2008, the Department of Housing and Urban Development proposed modifications to the GFE, but critics said the revised disclosure was too lengthy — three pages — and predicted that it would become just another part of the paper blitz that cascades over buyers and mortgage applicants.

Kurt Pfotenhauer, chief executive of the American Land Title Association, said “if the [revised] GFE were a rocket, it would still be sitting on the launch pad. Not only has it failed to simplify consumer shopping, there is evidence that [it] is actually confusing shoppers”

Phillip Schulman, a Washington lawyer who represents mortgage lenders and banks, said the survey results “are not surprising” because the disclosure looks complicated and “doesn’t tell buyers what they really want to know: How much they’re going to pay per month” from a given lender, with all expenses factored into a bottom line number.

Brian Montgomery, who was federal housing commissioner during the final years of drafting the revised GFE, said in an interview, “we believed that making shopping easier would be a benefit because there had been very little real shopping before. But obviously we didn’t have a magic wand” that would change consumers’ traditional behavior overnight.

Meanwhile, Congress has shifted responsibility for GFEs and other consumer mortgage disclosure issues to the new Consumer Financial Protection Bureau, which is scheduled to spring to life in July. The bureau has announced that streamlining the GFE and combining it with federal truth-in-lending disclosures will be one of its high-priority projects.

But given the glacial pace of federal rulemaking, the three-page GFE is likely to remain in use for many months — maybe a year or more — before any new streamlined version takes its place. So here’s a smart action plan for you as a consumer. If you seriously want to shop intelligently for a home loan, buck the popular trend: Read your GFE. And use it to compare costs — line item by line item — among multiple lenders.

Ken Harney is a syndicated real estate columnist.