HUD good-faith estimate reform is too late and much too little

Steve Preston, secretary of the Department of Housing and Urban Development, recently announced what he said was a “mammoth leap forward for the consumer.”

So what does this mammoth leap entail?

It’s an overhaul of the good-faith estimate used during the mortgage lending process.

This good-faith statement, which is given to mortgage applicants, is already required under the Real Estate Settlement Procedures Act, or RESPA.

It’s supposed to give people an estimate of their settlement charges and loan terms. Often it doesn’t.

Preston also announced that a new page will be added to a new standardized HUD-1 settlement statement. This change is intended to allow consumers to compare their final loan terms and closing costs with what was listed on the good-faith estimate.

“Consumers need and deserve to know what they’re getting themselves into before they sign on the dotted line,” Preston said during a teleconference.

To this so-called big announcement, I say big whoop-de-do.

So now we get “reform,” after people have bought homes they couldn’t afford with exotic loans that should never have been sold to them.

Now we have so-called major reform, when lending standards are so high and credit so tight it’s hard to close on a loan anyway.

Now.

OK, so I guess now is better than never. Borrowers could save up to $700 by using the forms to comparison shop for the best-priced loans, according to HUD.

Lenders and mortgage brokers won’t be required to provide consumers with the new three-page standardized good-faith estimate until Jan. 1, 2010.

That’s 2010, as in more than a year from now.

And why is it taking more than a year to implement this new form?

Preston said many of the lenders felt they needed time to make “operational changes.”

The industry needs time to train people to use the new form, said Robert Davis, executive vice president of mortgage finance, risk management and public policy for the American Bankers Association.

Are we not a technologically advanced society? My 13-year-old daughter knows how to download a PDF. HUD is giving the industry the forms. Besides, much of the information on the revised statements is something loan originators should have been disclosing and discussing with mortgage applicants anyway.

While this effort by HUD is helpful, it’s by no means a mammoth leap forward for consumers.

“Rather than make the process simpler, it will be harder to understand,” Davis said. “This is going to increase confusion.”

Davis also complained that the new form does not explain “yield-spread premium,” although there is a place on it to disclose this fee, which a lender pays a mortgage broker for putting a borrower into a home loan with a higher interest rate. This is not an illegal practice, but it is a back-end way for a broker to earn more money. In some cases, borrowers get stuck with a higher interest rate even though they could qualify for a less expensive loan.

Yield-spread premiums are “rarely understood by, or fully disclosed to, borrowers,” Preston said. “These premiums are directly tied to the higher interest rates that borrowers pay. Consumers deserve to understand this.”

To be fair, efforts by HUD to get better disclosure for consumers have been met with considerable resistance from the industry. It did take a mammoth effort to get what the agency got.

But for me, mammoth reform would include legislation that imposed new bone-chilling cash penalties and prison sentences for anyone who deceives consumers anytime during the mortgage process.

Mammoth would be creating a commando-type enforcement division at HUD to aggressively go after bad lenders and mortgage brokers. Mortgage professionals should be as afraid of HUD as many people are of the IRS.

Mammoth would require every first-time homeowner to go through mandatory housing counseling before they could get a mortgage. You have to pass a test to drive a car.

Mammoth would be creating a new worksheet as part of the mortgage application process that would look at all the current monthly expenses of a potential borrower. Applicants with prior approval would have to list regular monthly living expenses such as child care, cell phone and health care costs to see if the loan would take up more than 38 percent of the family’s monthly net income. Although the mortgage applicants might still technically qualify for the loan, at least they would have been walked through a realistic exercise to determine the true affordability of the mortgage they’re applying for.

The new standardized good-faith estimate is just a start to the overhaul needed in how loans are sold.

HUD should push for so much more. And if Preston can’t do it, President-elect Obama should appoint someone to oversee HUD who would come across as Attila the Hun.

If there was ever a time we could truly get mammoth reform, it’s now.

Washington Post Writers Group