When trying to explain a lack of investor understanding, one of the more popular bloggers in the financial space uses the same headline for every entry: “They just don’t get [fill-in name of the stock].”
Critics say the same confusion sometimes exists in the mortgage industry – particularly when it comes to good faith estimates (GFEs). A year ago, when the new RESPA rules went into effect, originators and lenders warned that it would be unworkable and would create a logistical and legal nightmare for lenders. But that didn’t happen.
At the same time, consumer groups and companies like ours that want to lower costs for borrowers praised the new rules and boldly proclaimed that we were embarking on new era of transparency that would lower costs for consumers. But if you read BankRate’s 2010 closing cost study, it appears, at least on first blush, that didn’t happen either. Or did it?
According to the BankRate study, origination and closing costs on a $200,000 purchase mortgage have increased by 37% since the new GFE took effect. Some of this is to be expected. After all, lenders are now working in a full-doc environment that requires significantly more work on every application. The bigger question is, has the new GFE led to inflated third-party costs? The conventional wisdom is that instead of lowering costs, the new rules had the unintended effect of raising them. The theory goes, faced with having to stand behind the third-party fees or face significant financial consequences, the industry artificially raised their estimates in order to more easily “limbo under” the bar.
I have another theory. I think the new GFE is working, up to a point, and what we’re seeing is the end of bait-and-switch low-balling. A study released last week by Ernst Publishing has come to the same conclusion. In other words, for the first time in recent memory, originators are telling borrowers the real cost of the products that go into making a mortgage. This is an important first step in treating borrowers like adults and eliminating one of the great traditions of the mortgage industry: the unexpected costs that suddenly appear at closing.
The question is, can we as an industry build on this? It took new regulations to get us to this point. Now that we’re beginning to empower and educate borrowers to take more control of the mortgage and closing process, we’ll need to step up efforts to provide additional, innovative options. Our company has done exactly that by offering title insurance directly to the consumer, and, in the process, reducing premiums by 35%. I suspect it won’t be long before other innovative companies offer more consumer-friendly (read “lower cost”) options as well.
But consumers won’t necessarily learn about these options unless lenders, brokers and loan officers tell them they can have them. It’s the right thing to do… not only because it is what the spirit of the law requires, but it also makes good business sense. It positions loan officers, real estate agents and other advisers (accountants, lawyers, financial planners, etc.) as trusted advisers.
The fact is, the new GFE is putting control of the settlement process in the hands of borrowers and protecting their wallets as a result. It encourages them to know what they are paying for and why, and how to get the lowest rate and the best terms, while ultimately saving significantly on their closing costs. The key is, in the immortal words of Smokey Robinson, “You’d better shop around.”