Will new mortgage paperwork help housing market?by Peter Miller
The Consumer Financial Protection Bureau (CFPB) says we need to make the mortgage process simpler and more understandable. This sounds like a good idea, but having just completed a mortgage refinance, I’m not particularly sure that the CFPB is on the right track.
It was in January 2010 that HUD introduced a new form that borrowers were supposed to receive within three days of making a loan application. The 2010 Good Faith Estimate of Closing Costs (GFE) was and is an excellent form, a huge improvement over the paperwork that had previously been used for many years. With the 2010 GFE you could clearly see your interest rate, closing costs and whether the loan had a balloon payment or prepayment penalty.
There is also a federal Truth-in-Lending form, which outlines precise mortgage terms. The CFPB wants to combine both the GFE and the Truth-in-Lending form into a single, readable form called a Loan Estimate.
The real issue, though, has nothing to do with graphic design or plain type. Behind all the claims of readability and convenience what’s really at stake is money.
“Through a simpler and better understanding of their costs,” said then-HUD Secretary Steve Preston in 2008 in explaining the 2010 GFE to come, “consumers can shop more effectively for a mortgage. Based on HUD’s economic analysis, we estimate that improving upfront disclosures on the GFE and limiting the amount that estimated charges could change will save consumers nearly $700 in loan costs.”
A 69 percent rate?
So is the new proposed form any better than the information I got when applying for a loan in just the past few weeks? Will it save anyone more money?
The new Loan Estimate is three pages long versus two pages for the current Truth-in-Lending and three pages for the 2010 GFE, a total of five pages.
The new form certainly has more white space, bigger type and better graphics. To the extent that the form is clear and allows easier loan comparisons it should help borrowers. But it won’t lower mortgage rates and it’s not a great improvement over the current forms
For instance, on page three the Loan Estimate shows the cost of the loan after five years including the interest rate, the total payment cost, the scheduled principal reduction and the interest paid.
Then it shows the “total interest percentage,” or TIP, the “total amount of interest that you will pay over the loan term as a percentage of your loan amount.” In the case of the model form the total interest percentage is 69.447 percent.
In other words if you borrow $162,000 over 30 years at 3.875 percent, the total interest cost over the life of the loan will be $112,240.80 — 69 percent of all monthly payments.
But few mortgages last 30 years and the total interest cost of the loan can change radically by making prepayments. For these reasons it would be fine to include the TIP figure in the new form but with a clearer explanation of what the figure means and that it’s not absolute.
The new form also needs a line to indicate whether the new loan is for a prime residence or an investment property. Mortgage rates vary depending on the use of the property and this is a key factor which should be shown to alert lenders and mortgage investors.
Lastly, the form says borrowers may elect to shop for certain services including title insurance. Right. The CFPB ought to shop for title insurance; they might be surprised at the pricing uniformity they encounter.
The reality is that the forms we have now are much better than they used to be and fixing them is not a major project. Repairing the mortgage system with real reform is much more important, and untouched with the new paperwork.