Original posted in the New York Times by James R. Hagerty:
My guess is that the typical American puts more thought into the search for a flat-screen TV than into the choice of a mortgage lender.
Shopping for a TV is fairly straightforward. You read reviews online or in Consumer Reports; you eyeball a few models in the store to see if the image looks sharp; then you buy from whichever merchant has the lowest price. If the TV doesn’t work, the merchant gives you a new one.
Shopping for a mortgage is more complicated, less fun and infinitely more dangerous to your long-term financial interests. At the end of the process, you probably have no idea of whether you got the best deal available. Was the upgrade on those cherry kitchen cabinets really worth the high rate and fees you paid to the lender affiliated with your friendly home builder? Probably not, but that salesman sure was persuasive, and you were glad to be relieved of spending the next three days shopping for mortgages.
Now help is on the way from a most unlikely source: The U.S. Department of Housing and Urban Development, or HUD.
Federal rules that take effect Friday mandate a standard, three-page Good Faith Estimate that urges consumers to shop around for the best loan and helps them compare lenders’ offerings. The rules, announced by HUD in November 2008 but just taking effect this week, are an update of the Real Estate Settlement Procedures Act, a 1974 law known as Respa. (See WSJ story.)
One difficulty of shopping for mortgages is that the lender with the lowest rates often isn’t offering the best deal. High fees can wipe out the benefits of low rates, and little-noticed features such as prepayment penalties might blow up on you later on. Even for members of Mensa, it’s hard to compare different combinations or rates, “points” (paid in exchange for a lower rate), fees and other terms. Lenders often sprinkled in lots of confusing charges, such as processing and messenger fees, to pad their margins. Dickering over theses “junk” fees distracted borrowers from the bigger picture of total costs.
All of these complexities favor lenders, of course. The more confused you get, the less likely you are to realize you just got fleeced.
To address those problems, the new estimate form requires lenders to wrap all the fees they control into one “origination charge.” That lets you compare one lender’s fees with another’s. Jack Guttentag, a finance professor emeritus at the University of Pennsylvania’s Wharton School, recommends that borrowers focus on two items as they shop: the interest rate and the “adjusted origination charge,” which includes any points paid to lower the rate.
Good Faith Estimates have been around for decades, but there was no standard format. Under the new rules, lenders and mortgage brokers are required to give consumers the standard estimate forms within three days of receiving a loan application.
Lenders aren’t allowed to increase the origination fee from the estimate. Some additional charges, including title services and recording charges, can increase by as much as a combined 10%. Estimates for other charges, such as homeowner’s insurance and other services provided by third parties selected by the borrower, aren’t subject to such limits.
Title insurance typically is the largest fee, and the new forms let consumers know they don’t have to accept the insurer suggested by the lender. Mr. Guttentag says title insurance can be “vastly overpriced” and consumers should take the time to shop for it.
Settlement firms, which organize the closings of home sales, will be required to issue a new version of the HUD-1 form used in closings. This new HUD-1 includes a comparison of the estimated and final costs, as well as a summary of the loan terms.
Will all this make a big difference? Mr. Guttentag, who has been exposing the tricks of lenders and brokers for decades, thinks the new rules will help, though they aren’t a cure-all.
Much depends on whether Americans want to put in a bit of effort rather than simply accept the often biased mortgage advice of a real estate agent, home builder, broker or banker. The real estate agent may urge you to use an affiliate of his firm, or recommend the lender most likely to grant a loan quickly rather than the one with the best terms. The builder wants you to use his in-house lender. The brokers and loan officers are working for themselves, not for you.
When you’re trying to pick a new TV, you don’t rely on a TV manufacturer to give you an impartial review of the alternatives.
Comment originally posted on Reuters by Felix Salmon:
If you get one of these forms from three or four different lenders, and they all fill out this table, then being able to choose the best mortgage for you is going to be much easier than it has been until now.
It might have been nice to include “adjusted origination charges” along with “total estimated settlement charges” on this form, because a conscientious consumer should shop around in any case for things like title insurance. Still, bundling everything into one figure at least gives lenders an incentive not to rip off their borrowers too much on those fees.
Is this going to make a big difference in practice? Are homebuyers going to spend as much time comparing different mortgages as they do comparing different televisions? Or are all those numbers always going to be so confusing that many people will end up just doing what they’ve historically done, which is trust a mortgage broker?
My hope is that a few big lenders are going to take a leaf out of Progressive’s book, and encourage homebuyers to shop around, making it as easy as possible to compare different offers. But one thing’s for sure: if your mortgage broker doesn’t show you different options in this kind of ultra-clear standardized format, find a different mortgage broker.