Grappling with ‘good faith’

Last month, mortgage banker Bruce Maasbach got a panicked call
from a friend’s daughter, who was about to close on a New York City
co-op.

The buyer told Maasbach she was reluctantly considering purchasing
an apartment in an all-cash deal because she’d just received an
estimate from her bank putting the cost of closing her loan at $12,000.
That’s more than triple the usual closing costs for a co-op, said
Maasbach, the managing director of the Manhattan division of mortgage
bank Luxury Mortgage.

“She was rather taken aback,” said Maasbach. “She said to me, ‘I’m not spending this kind of money [on fees].'”

Maasbach has received many similar calls since January, when new
federal regulations went into effect governing the “good faith
estimates” that lenders issue to mortgage applicants, outlining loan
fees and other closing costs.

The new regulations require estimates of all mortgage origination
fees and transfer taxes to be identical — sometimes down to the cent
— to the fees charged at the closing table. If the fees exceed the
estimates, the lender, not the borrower, must pay the difference.

The changes are meant to make the mortgage process more transparent
for consumers, and to eliminate the unexpected fees that commonly
popped up at the closing table during the boom.

But experts say the revisions are having unintended consequences.
Because New York City’s closing costs are so high — they can be 5 to 6
percent of the loan amount — one mistake could easily cost the loan
originator tens of thousands of dollars.

“It’s huge money,” said Richard Martin, a senior vice president at
DE Capital Mortgage — a partnership between Wells Fargo and brokerage
Prudential Douglas Elliman. In New York, he said, “the stakes are
vastly higher” than in other places.

Because lenders and mortgage brokers fear being on the hook for
mistakes, they are greatly overestimating closing costs, causing
confusion and often panic among buyers, experts noted.

The complicated new GFE process is slowing down deals just as the
market is starting to pick up. And while the new regulations are
intended to save consumers money, they are actually costing them more,
at least in the short term.

“Deals are more expensive to do, because people are so nervous
about the numbers being correct on the good faith estimate,” said
Maasbach, explaining that some New York-area banks and mortgage brokers
are increasing application and processing fees by roughly $100 per
transaction, in part to account for the labor required to check and
recheck GFEs.

In the past, good faith estimates had “no teeth,” said Brian
Sullivan, a spokesperson for the U.S. Department of Housing and Urban
Development.

“You’d begin the process of getting a loan, and then 60 days later
you’re going to closing, and you’re presented with a loan that doesn’t
resemble what you were offered,” he said.

The new GFE is a standardized form that must be generated within
three days of the initiation of a mortgage application. In addition to
the fact that estimates for lenders’ fees and transfer taxes must be
practically identical to the final fees paid, a variation of only 10
percent is allowed for estimates of nonlenders’ costs, like title
insurance and appraisal fees. If the estimates aren’t close enough, the
lender pays the difference (there is no penalty for the buyer). If
there is a material change, such as a change in the price of the unit,
a new GFE must be generated.

Many mortgage brokers and lenders agreed that borrowers should be
offered more transparency, but say there are problems with the
implementation of the new rules.

First, in a climate where getting a mortgage is far from assured,
many buyers start the process of applying for a loan after their offer
has been accepted, but before the contract has been signed. That often
means the terms of the agreement are still being ironed out while the
lenders are generating the GFE, which can lead to delays or costly
mistakes, as one lender discovered at the closing of a $1.7 million
Upper East Side co-op in April, Maasbach said. The lender forgot to
disclose the mansion tax (paid by buyers of homes over $1 million). As
a result, the lender had to fork over $17,000 at the closing table, he
said.

To avoid mistakes likes these, “you can imagine that there’s a lot
of double-measuring and double-checking before the deals get to
closing,” said Jeffrey Appel, a mortgage loan officer at Bank of
America. “If an error is picked up, there’s a delay.”

The costs get passed on to consumers, in the form of higher bank fees and late fees if their closings are delayed.

The new rules also require mortgage brokers and lenders to spend
time on the phone with vendors, like title insurance providers, finding
out how much they charge, explained real estate agent and mortgage
broker Richard Bouchner, founder of Bouchner & Co. Real Estate.

To protect themselves from possible mistakes, many loan originators
inflate their estimates. “If someone tells me $1,200, I’m going to put
down $1,500,” said Bouchner. “I’d rather be way higher.”

Many also list fees — like transfer taxes — that they know will
likely be paid by the seller, just in case. That often causes confused
buyers to panic, which can jeopardize a deal, especially if the
contract hasn’t yet been signed. “The client will get this enormous
number and be calling us, hysterical, saying, ‘How could my closing
costs be so high?'” Maasbach said.

HUD is aware that the new law presents some “challenges from an
operational point of view,” Sullivan said. But policymakers believe the
problems will fade away as lenders become more comfortable with the new
regulations.

“We do believe that as time goes on, and they become more fluent in
these new rules, they won’t feel the need to inflate their costs,” he
said.