Real Estate Information Archive

With the arrival of a new year also came new ways to compare home loans.

On January 1, 2010 new rules went into effect, which mandate that all home loan applicants be given a new version of the Department of Housing and Urban Development’s “Good Faith Estimate” (GFE) form.

The new form is HUD's latest development in the Real Estate Settlement Procedures Act, RESPA, (12 U.S.C. 2601) which, regulates real estate transfers involving a "federally related mortgage loan" by requiring, among other things, certain disclosures to borrowers and is designed to clarify what home loans will actually cost, which should make it easier for borrowers to compare home loans. All lenders must disclose their fees and put them in the same places on the form.

In addition to interest rates, there are other costs associated with loans that should be compared. These are what are typically known as “origination costs,” which are the fees a lender charges, and there are “settlement fees” – such as appraisal fees, title insurance, etc. – that are part of the costs.

The new regulations require that lenders disclose these fees uniformly and then stick to them. For example, if you are quoted a $450 appraisal fee on a Good Faith Estimate form, you cannot be charged more than 10 percent of the price quoted.

According to HUD "The intent of the standardized GFE and HUD-1 is to provide borrowers an easier means of comparing loan offers, and to determine that they are getting the loan at settlement that they were offered in the GFE." Thus making it easier for consumers to do an apples-to-apples comparison of different loan products.

On the third page of the three-page form, there is a place to do a side-by-side comparison of up to four different loans and recognize what is the best deal. Sometimes, borrowers get so caught up in what the interest rate or monthly payment is that they lose track of other costs associated with a loan, and it becomes more expensive than they thought.

Proponents claim HUD’s new efforts will improve transparency and uniformity and in turn assist consumers with finding the best loan deal more easily.

Critics claim the new HUD mandated GFE makes it easier to hide the yield spread compensation because it actually misrepresents the yield spread as a credit back to the borrower. At the very least the new HUD GFE takes focus off of complete transparency - and does not squarely break numbers down for borrowers. The lack of line-items leaves mortgage brokers holding the bag when it comes to explaining fees without being able to direct them to the specific line item.

The view from this desk is that consumers should know upfront in plain simple language exactly how much fees are for originating loans. The new muddled GFE often provides the consumer with only one lump sum amount which is the summation of different fees going to different people.

I believe brokers should be compelled to provide an additional form with a simple line by line breakdown of all their costs on one easy to understand page.

HUD just changed its condominium rules again, and there's both good news and not so good news for investors and developers tucked away in the revisions.

On the one hand, HUD relaxed its previously controversial requirement that at least fifty percent of the units in a project be sold before FHA could insure loans for new buyers on individual units.

Under the amended rule, FHA financing will be available in projects where at least 30 percent of the existing units have been sold. This change is important to developers and investors because many newly-constructed projects have had trouble pre-selling units in the current tough real estate market.

A large number of new developments and conversion projects would have been knocked out of eligibility for FHA financing on their remaining units under the 50 percent presale rule.

HUD also relaxed its controversial policy that no more than 30 percent of the units in a condo project could be financed with FHA-insured mortgages. The new standard maximum will be 50 percent. Under certain circumstances, however, HUD said it would be willing to consider situations where the percentage of FHA financing on individual units is even higher, provided the project has been completed for at least a year, and the condo association's operating budget provides significant reserves for capital improvements and deferred maintenance.

In its revised regulations, HUD stuck with a number of previously announced requirements that have drawn criticism from investors and developers, including that fifty percent of the units be owner-occupied. However, HUD says it will not count vacant or tenant-occupied bank-owned REO as non-owner occupied units in the computation.

HUD will continue to require that no more than ten percent of the total units in a condo project be owned by a single investor - and that the 10 percent limit will include unsold units that developers are renting out.

That policy has sparked renewed controversy within the building and investment communities. Including unsold units rented out by developers or project investors will threaten the viability of many condo communities. Developers routinely rent unsold inventory to generate cash flow so they can keep paying their construction loans.

If HUD prevents them from selling units to buyers using FHA financing, builders may simply "hand the keys back to banks and walk away".

One footnote to all this: HUD labeled its latest condominium changes "temporary." They take effect December 7 and can only be counted on by investors and developers through December of 2010.