Will Consumers Really Save Billions With HUD’s New Form?

by Peter G. Miller
November 19th, 2008

A few days ago we wrote about the new Good Faith Estimate form developed by HUD — a form which the government says will save consumers $700 per transaction, and also a form which is not required until January 1, 2010.

In response, Marc Brinitzer with LendingClarity.com posted the following note with us:

“Peter, I have reviewed the new form and I like it. That may sound strange coming from a mortgage broker, since we are the group perennially targeted by Respa Reform. The form is much clearer in many ways for the consumer than past disclosures, and it smartly allows for variation in fees over which we have no control, like title and escrow costs (when our side didn’t pick the title and escrow companies).

“I question HUD’s assumption –- and by extension your figures –- with respect to $700 savings per transaction consumer can expect. Exactly where will this come from? Lender fees, appraisal, title escrow–what we call “third party fees” are not generally negotiable items. That really leaves broker fees, and Yield Spread Premium (YSP) in particular as the focus. Certainly this is the spot where bad loan originators have traditionally hidden part of their commission from view, but I’m not buying the estimate.

“With respect to adoption of the new rule, banks have already begun requiring similar disclosures as we speak, and I’m convinced most will have this in place by the end of Q1 2009. Wells Fargo and Vertice (Wachovia Bank) here in our market require new Mortgage Broker Fee Disclosure designed to starkly reveal any and all fees paid to the broker, including YSP, early in the loan process.

“But bad mortgage brokers are only half the problem. Mortgage bankers — like the dude at your local BofA branch — doesn’t have to tell the consumer about all the YSP he’s stuffing into his pockets. Thank the mortgage banking industry lobby for this tilted playing field. I assume the new RESPA rule will be similarly bias.

“And ironically, here is what that disparity ultimately leads: the wholesale channels for third party originations gets choked off as the industry points fingers at mortgage brokers. Mortgage brokers either become bankers or go to work for them, reducing competition in the marketplace and forcing consumers to get their mortgages from the only group allowed to gouge them by not disclosing all their fees.

“Great idea; unintended consequence.”

This is a great comment and much appreciated. Thanks Marc.

The $700 figure likely goes back to 2002. Then-HUD Secretary Mel Martinez said the public could save $10 billion a year by reforming the way settlement services were sold. His idea was to have lenders pay for closing services and to then charge the public. Since lenders would buy in bulk closing costs would fall.

The alternative to the “one package” suggestion from Martinez was the “two package” concept, the idea that both lenders and other parties would offer title services. A borrower would essentially buy a loan and also a closing package. (For details, see at OurBroker.com, Real Estate Settlements: Public Cheated Out Of $10 Billion — Per Year!)

The Martinez approach would force settlement providers, especially title insurance companies, to compete for business.

Now, about that $700.

HUD is the one who said savings would amount to $700. Surely HUD would not lie to the American public. No doubt they have crack researchers, economists and statisticians who figure out this stuff. So, if HUD says we can save $700 per transaction with the new form, and if we accept that what HUD says is true, then with a little math we can see that roughly $9.5 billion will be saved by consumers each year.

In turn, if HUD is going to hold out such savings then it needs to explain why such benefits must be delayed 14 months. Surely no one believes that lenders cannot print the right forms or develop the correct software in, say, 60 days, so that consumer savings can begin as soon as possible.

On the matter of yield spread premiums, the form requires that lenders show origination charges.

I suspect that consumers don’t actually care about yield spread premiums any more than they care about the lender’s electric bill. Instead, they care about the gross cost of the loan and the gross cost of settlement. In other words, if Lender Smith gets me the loan with the lowest rate, the fewest points and the lowest closing costs I’m interested, even if Smith makes a bigger profit than Lender Jones on the exact same loan, say a basic FHA mortgage.

The form does a fairly good job of describing gross costs. The catch is that many consumers will not shop for loans and thus will pay more than they should. That’s not a problem any form can fix.

For the full story, see: HUD Saves $9.5 Billion — For Lenders.

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