HUD's new mortgage rule isn't exactly a giant step forward for buyers
Housing and Urban Development Secretary Steve Preston recently announced what he said was a "mammoth leap forward for the consumer." So what does this 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. It's supposed to give people an estimate of their settlement charges and loan terms. Often it doesn't.
Preston also said 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 estimate.
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 reform, when it's hard to close on a loan. I guess now is better than never.
But lenders and mortgage brokers won't be required to provide consumers with the new three-page standardized good-faith estimate until Jan. 1, 2010. 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 R. Davis, an executive vice president with the American Bankers Association.
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. 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.
"Consumers deserve to understand this," Preston said.
To be fair, efforts by HUD to get better disclosure for consumers have been met with considerable resistance from the industry. But for me, mammoth reform would include legislation that imposed new cash penalties and prison sentences for anyone who deceives consumers during the mortgage process.
Mammoth would be creating a commando-type enforcement division to go after bad lenders and brokers. Mortgage professionals should be as afraid of HUD as many people are of the IRS. Mammoth would require first-time buyers to go through housing counseling.
The new 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 Barack Obama should appoint someone to oversee HUD who would come across as Attila the Hun.
Michelle Singletary is a columnist for The Washington Post. She can be reached at singletarym@washpost.com. 