March 14, 2008 HUD Proposes Mortgage Reform Help

HUD No. 08-033 Brian Sullivan (202) 708-0685 www.hud.gov/news/ For Release Friday March 14, 2008 HUD PROPOSES MORTGAGE REFORM TO HELP CONSUMERS BETTER UNDERSTAND THEIR LOAN, SHOP FOR LOWER COSTS Jackson: Need for reform is now; proposal to save consumers almost $700 WASHINGTON – In an effort to significantly improve the complicated, unclear and costly homebuying process, U.S. Housing and Urban Development Secretary Alphonso Jackson today proposed mortgage reform designed to help consumers better understand their loan terms so that they can shop more effectively for the largest purchase of their lives. HUD's proposal reforms the more than 30-year old rules of the Real Estate Settlement Procedures Act (RESPA), and improves disclosure of the loan terms and closing costs consumers pay when they buy or refinance their home. For the first time ever, HUD is proposing that mortgage lenders and brokers provide consumers with a standard Good Faith Estimate. By more openly disclosing the key elements of the loan and by controlling fee inflation, the Department seeks to provide consumers with enough information to allow them to shop more effectively for the lowest cost loan. HUD's economic analysis finds that by offering consumers clearer, more certain cost estimates, the average borrower will save nearly $700. "A lot of the mortgage problems we see today are directly related to the fact that few people fully understand this process," said Jackson. "Buying a home can be very intimidating. Consumers have had no assurance that the loan terms and closing costs they are offered will reflect what they confront at the settlement table, and that's been one of the factors driving the current housing downturn. Our proposal fixes that. We owe it to the American homebuyer to give them the information they need to make smart choices." Brian Montgomery, HUD's Assistant Secretary for Housing, added, "It's not right that millions of consumers go to the settlement table without fully understanding the mountain of paperwork they're asked to sign and, on top of that, expected to pay thousands of dollars in closing costs for services they've never heard of. This new Good Faith Estimate will give families the tools they need to understand what they’re getting into before they sign on the dotted line." In light of recent increases in loan defaults and foreclosures, the need for reform is imperative. When President Bush announced his comprehensive plan to address rising foreclosures last August, he pledged to offer new mortgage rules that would help families to avoid getting into trouble in the first place. This proposed RESPA rule makes good on that pledge. HUD is proposing to offer consumers a standard Good Faith Estimate (GFE) that will substantially enhance disclosure of all important aspects of the loan, including: The interest rate and monthly payment; Whether the interest rate and principal balance can increase and by how much; and Whether the loan has a prepayment penalty or balloon payment. The proposed Good Faith Estimate would consolidate closing costs into major categories to prevent "junk fees" and display total estimated settlement charges prominently on the first page so the consumer can easily compare loan offers. In addition, HUD's new proposed rule would specify the charges that can and cannot change at settlement. If a fee changes, HUD proposes to limit the amount it can change. HUD also proposes to modify the HUD-1 settlement statement to help consumers compare the anticipated charges on the Good Faith Estimate and their actual charges. The Good Faith Estimate would also require that lender payments to mortgage brokers (often called Yield Spread Premiums) be disclosed. It is HUD's belief that these payments are directly dependent on the interest rates that consumers agree to and therefore ought to be disclosed. To ensure that HUD's new proposal would not create a consumer bias against brokers, the Department did rigorous consumer testing and found the proposed Good Faith Estimate helped consumers to select the lowest cost loan more 90 percent of the time, regardless of whether the loan was originated by a lender or a broker. Finally, HUD is proposing that settlement agents read a "closing script" to borrowers at the settlement table and that a copy be provided to the borrower. This closing script would ensure that the settlement agent not only compares the borrower's estimated and actual charges, but would detail the key terms of the loan. HUD's extensive consumer testing found borrowers appreciated the enhanced disclosures, believed the loan details on the closing scripts were clear and understandable, and reacted positively to having the scripts read out loud. Legislative Changes to RESPA To further bolster consumer protection and to ensure uniform and consistent enforcement of RESPA, HUD intends to seek legislative changes to the Act that will complement the regulatory improvements made by the rule. Currently, RESPA does not provide HUD with enforcement mechanisms for some of the most important consumer disclosures and protections. A lack of enforcement authority and clear remedies for violations of critical sections of RESPA negatively impact consumers and diminish the effectiveness of the statute. HUD will seek the authority to impose penalties for violations of specific sections of RESPA, including Section 4 (provision of uniform settlement statement); Section 5 (GFE and settlement costs booklet); Section 6 (loan servicing); Section 8 (prohibition against kickbacks, referral fees, and unearned fees); Section 9 (title insurance); and portions of Section 10 (regarding escrow accounts). In addition, HUD proposes the authority for the Secretary and State regulators to seek injunctive and equitable relief for violations of RESPA; require delivery of the HUD-1 to the borrower three days prior to closing; and establish a uniform statute of limitations applicable to governmental and private actions under RESPA. To Read the full text of HUD's proposed RESPA rule, visit HUD's website. ###
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Unless You're Paying All Cash, Call A Lender Before Looking for Your Home

by Deniece Watkins, Realtor - Cashin Company, Los Altos
in cooperation with Alfredo Ramirez of United Home Loans
March 2008

When you begin thinking about buying a home or investment property, the prudent first step is to talk to a lender. It sets you, the buyer, up for a chronologically correct plan for success, especially in our area.

MONTHLY PAYMENTS
Your lender will let you know what to expect to pay monthly based on how much you can and want to pay for the price of the property. They will inform you of loan options available to you at the time of your purchase. Maybe you want to pay principal plus interest? Maybe you want to pay interest only? Maybe you want to pay your loan off in 15 years? Maybe you want to pay money up front (buy down points which are a tax write off on your initial purchase) to buy down the interest rate you will pay over time on the loan? Maybe if you put more or less money as a down payment on the property, you can benefit from a different monthly payment? These are only some of many choices available to you, the borrower.

DOWN PAYMENT
If you put 20% down on your principal residence, what will your monthly payments be? Will a lender allow you to make a 10% down payment? If you are considering an investment property in a county that has been subject to a lot of short-sales and foreclosures in the recent banking debacle, what down payment do they require for the county and city in which you are interested in buying? (Some lenders are requiring 35% down payment on investment properties right now. There are cases where 25% down payment is being required for a principal residence as well!)

CREDIT SCORE
So you think that "in general" you qualify for a $750,000 house. However, you haven't checked your credit score recently and seen that some credit card company made a mistake and recorded a late payment on your account that caused your 700 FICO score to drop to 645. Do you know that can affect the loan amount for which you qualify? It can affect the interest rate available to you, and it can also affect the amount that you need to put down on the home. The free credit report you can get online is not the same report used by a lender. The report you get when you buy a car is not the same either. (By the way, buy your car only AFTER you close escrow on your house to help your credit score for your home purchase.)

RESERVES
Based on your FICO score, based on your down payment, and based on your income, you may be required to have more savings "reserves" as part of your qualifying for the loan you want. These reserves range anywhere from two to twelve months of anticipated principal, interest, taxes and insurance (PITI).

PRICE RANGE
The lender will tell you the highest price you CAN pay for your home, based on the monthly payments you prefer, based on the down payment that works for you, based on your credit score, based on rents received (income property), based on you considering the property an investment property, an income property or second home. You get to conclude the price range you WANT to buy in from there.

GUIDELINES ARE CHANGING
Because there have been so many changes going on with banks lately, it is more important than ever to have a relationship with a lender. What was available to borrowers a month ago is not something a borrower can be certain of today. It is not exaggerating to say that guidelines are changing daily right now.

REQUIRED DOCUMENTATION
A lender needs certain documentation to approve your loan. This documentation is typically, two months pay stubs (to prove your income), two months of all asset statements (to prove your down payment and reserves), and it is possible that you will also be required to provide two years worth of tax returns. A loan application will also be required, along with your recent credit scores (specific report run by your lender).

ON TO STEP TWO
Once you have concluded all of your above choices, you can go out and look for a home to buy, knowing you can actually buy it. You will not be shocked or overwhelmed with all of these details after you have found a property you love.

99% of people instinctively look for a home, then talk with a lender, then the home is gone, or they don't like the payments, or they don't get a tax write off, and they change their mind and end up getting frustrated. That frustration frequently causes a buyer to give up their home purchase all together, sometimes missing a perfect time to buy.

Talk to a lender first, then find your home. When you have spoken with your lender, not only will the home you want just fall in place for you, but you will have more time when you enter into contract on that dream home to pay attention to all of the documentation your Realtor will be needing to go over with you.