With this blog post I’d like to introduce a new contributing author on the NAMF blog. Bradley Allen, CFP, of Coast Capital Management has been at the forefront of the fiduciary movement for mortgage brokers and loan originators in Washington State. His comments and ideas articulate a future vision of the mortgage brokerage industry where higher duties are embraced, celebrated, and understood.  Here is a first in a what will likely be a series of blog posts by Bradley Allen. 

This link opens a PDF of the new Good Faith Estimate, which is set to go into effect Jan 1, 2010.

Let’s start at the top and go section by section.

Section Title:  SHOPPING FOR YOUR LOAN. 

The form advises, “Only you can shop for the best loan for you”.  This is true if you are involved in arms length transactions.  However, in Washington, mortgage brokers are fiduciaries.  Therefore, this guidance is incorrect and does fiduciaries (brokers) a disservice.  If your mortgage broker is acting as a fiduciary, you are not alone in shopping for a loan.  Your broker is legally bound to serve your best interests in this endeavor. 
 
The form further advises, “Compare this GFE with other loan offers so you can find the best loan”.   I support meaningful comparison shopping, but I object to this tenor of guidance.  First, if this GFE is being prepared by a broker, it is not a loan offer in the same sense that it would be coming from a lender.  To even refer to it as an offer is incorrect.  At best, this is an estimation of the terms and costs associated with one loan scenario that is available through the broker.  But since the broker is not a lender, it is not an “offer”.   Second, this guidance states that one can compare offers by comparing Good Faith Estimates.  This is patently untrue.  The differences in Good Faith Estimates provided by different brokers and/or lenders arise from many variables some of which are a simple matter of timing.  If they are prepared at different times, the loan parameters used to make the estimates being compared may well have changed to a material degree simply due to secondary market variation.  Without isolating those differences that are a function of secondary market conditions that exist at the date and time the GFE is prepared and are vary beyond the control of the broker the comparison of two “offers” on the basis of the GFE is highly likely to result in incorrect conclusions.  In any case, the actual terms will almost certainly vary even after the selection of a provider between the time of the initial GFE and the time any loan is locked.  At best GFE’s provide marginal information of use in selecting “the best loan”.  I would argue that the borrower’s best bet is to select a provider who is competent and cost effective in serving the borrower’s interests.  There is virtually no information provided in a meaningful manner in this GFE (or the existing GFE) that will assist the borrower in making such a selection. 

Section Title:  IMPORTANT DATES.

The form asks the preparer to enter a date through which the interest rate quoted will be available.  While a retail lender may be able to stipulate such a date, this line is just plain silly for a brokered transaction.  Since the broker doesn’t make a loan offer, the broker is not able to stipulate such a date.  Furthermore, virtually all interest rates are available at all times, so any date attached to an interest rate offer is meaningless.  What would be meaningful is a time boundary on the price available.  But in a brokered transaction this is impossible since the broker does not set price and wholesale lenders change price at least daily and may change price during any day without notice.  This item (like so many others) fails to recognize the fundamental difference between the retail lender transaction and the brokered transaction.  There is only one element of the brokered transaction under the control of the broker and that is the fee that the broker will charge for origination services.  It is inappropriate for the broker to address time frames during which any other charge or price element may be held constant – as a broker, who is not an agent of a lender, may not make any such commitment. 

Section Title:  ESCROW ACCOUNT INFORMATION

I cannot speak to how retail lenders work with regard to escrow accounts, however, for wholesale lenders impounds for property taxes and insurance are an option with most lenders and most programs.  The form does not help to make that clear.  Nor does it provide any information to the borrower concerning the effective cost associated with waiving impounds.  Many (most?) lenders will lower the price paid for the borrowers note by .25% if the borrower does not choose to have property taxes and insurance included in his mortgage payment.  The form ought to make clear where this is a choice and the cost associated with the options available.

Section Title:  SUMMARY OF YOUR ORIGINATION CHARGES

Section Title:  UNDERESTANDING YOUR ESTIMATED SETTLEMENT CHARGES – Your Adjusted Origination Charges

The first item is OK, but I would like to see it described differently.  Retail lenders can call this what they want, but for a brokered transaction this should be the “total charge levied by the broker for providing loan origination services”.  That’s what brokers do.  They do not “get loans”.  I should think that retail lenders would also take exception to calling this a fee for “getting a loan”. 

The next two lines are extremely troubling.  YSP and Discount Points are NOT adjustments to origination fees.  They have nothing to do with origination services.  They are price elements that are entirely at the option of the borrower (or at least they should be in the case of a brokered transaction).  They are not fees in any sense – in the brokered transaction.  In a brokered transaction, the lender price used in making the GFE ought to be included in the GFE, but not in this manner.  There should be a line that says, “lender price available at the interest rate and terms selected for this estimate and that exist for the terms assumed and on the date and time the estimate is made”. 

In a brokered transaction there is no such thing as a fee called Discount Points, or as the new form refers to it, a fee related to interest rate that increases total settlement cost.  In a brokered transaction there is simply the price the wholesale lender will pay.  It may be at a discount or a premium, depending on the terms selected and the date and time. 

I am not at all clear what HUD intends for the YSP line.  It is described as a credit arising from an interest rate that reduces total settlement charges.  Again, I think that this is best handled by simply disclosing the price the lender will pay for the borrowers note as defined and at the date and time the estimate made.  As an alternative, I support crediting any premium in the lenders price fully to the borrower.   But it is not clear if this GFE form is requiring all YSP to be reported here.  Is it OK, for example, for a broker to structure a loan that produces $2,000 of YSP and list only $1,000 here as a credit to the borrower?  Or perhaps list $0 of that $2,000 as a credit?  If so, where does that portion of the YSP not reported as a credit to the borrower show up?  I would prefer that the requirement be that any and all such YSP be listed as a credit.  And, I would prefer that this be handled in the manner described above and part of the total price to be paid by the lender.  In any case, neither this nor discount points should be shown as an adjustment to the broker’s origination charges. 

These price elements should be shown in such a way so as to make it clear the extent to which they increase or decrease total origination costs, and not as an adjustment to any one charge. 

Here is an example of the confusion that may be caused by this format.  Suppose I originate a $400,000 loan for a broker origination fee of $2,500.  Suppose further that all third party costs add up to about $2,000.  Total origination costs without considering the lender price are $4,500.  Now suppose that the borrower chooses an interest rate that is above par for the purpose of creating YSP to pay these origination charges.  As the loan originator I would look for an interest rate with a lender price of about 101.1 (1.1% YSP).  This will generate a “credit of $4,400 for the interest rate of [selected rate]”.  And, using the new GFE, the line “A” will show an adjusted origination charge of $2,500 – $4,400 or “-$1,900”.  I should think that a borrower will be unclear as to why there is a negative adjusted origination charge. 
Section Title:  INSTRUCTIONS

Understanding which charges can change at settlement

This form claims (and would have the issuer assure the borrower) that YSP or Discount Points, for the specific interest rate chosen, cannot change after the loan is locked.  It also states that the “adjusted origination charges” cannot change after the loan is locked.  This defies reality.  I may lock a loan based on an anticipated LTV only to have the appraisal come in higher or lower than expected such that the LTV crosses a price adjustment threshold.  Even thought the loan is locked, the price adjustment associated with the actual LTV will apply regardless of what was indicated on the lock agreement.  I may lock a loan before a credit score is determined and based on an estimated credit score.  Once known, the actual credit score may result in a price adjustment change.  The price based on the actual credit score will apply and any actual credit score adjustment may differ from than quoted in the “lock”.  In the typical brokered transaction, the only thing locked is the program and program price structure in effect at the time of the lock.  I appreciate the intent of the instruction, but in practice and even in the best of circumstances, these price elements are changeable beyond the control of the broker and the brokers estimated must not be held to such an inflexible standard.

Furthermore, many lenders will permit an interest rate change even under a lock agreement.  The caveat is that the pricing for any new interest rate will be that shown on the rate sheet at the time of the lock.  Let’s say I have a borrower who initially chooses an interest rate that has $1,000 in discount points.  Then, before docs are drawn the borrower decides that they would like the next lower interest rate at the higher discount points shown on the rate sheet in effect at time of lock.  In such a case, the rate and discount points will have changed after the loan is locked.  Such a change will necessarily change the “adjusted origination charges” after the loan is locked.  This GFE seems to prohibit such a thing from happening.

Using the shopping chart:

In the brokered transaction, given that YSP is to be credited to the borrower, the only price element inuring to the benefit of the broker is the broker’s origination charge.  In comparing loan programs and pricing shown by different brokers, a substantial amount of the overall cost is determined by the market for mortgage notes and will change on at least a daily basis.  A key comparison that should be made is at the level of the services provided by the broker and the charge levied by the broker.  This parameter is not shown as a point of comparison on the table.  Total estimated settlement charges is shown.  Comparing total origination charges is a false and largely meaningless comparison.  Two offers may differ by thousands of dollars because of wholesale lender price movements over the course of a 24 hour period.  The broker with the lower broker origination fee may well show up on this table as the loan with the higher total settlement charges just because of normal market movement.  Thus, the borrower may be lulled into selecting the higher priced provider on the basis of an inappropriate comparison. 

There needs to be a check box or other device on both the GFE and on the shopping chart indicating whether this GFE is prepared by a Broker or a Lender and whether loans being compared are from a broker or a lender.  Given appropriate differences in the way brokers and lenders disclose certain price elements, the comparison of an lender’s offer to a GFE provided by a broker can be confusing and lead to an incorrect selection.

OTHER COMMENTS:

No where on the GFE is there any place to indicate the lock period selected in making the quote.  This does show up on page three in the table provided for comparing offers from different originators.  It should show up on the GFE proper. 

CRITICAL:  There is no place on this form for identifying the charges of the lender in the brokered transaction.  Lender generally charge things like administrative fees, doc prep fees, fees for flood zone determination, and fees for tax related services.  These are valid lender charges that affect the total closing costs to the borrower. 

This GFE provides no estimate of cash needed or cash back at closing.  This is often a critical decision point for the borrower.  And the loan amount is often set based on the borrower’s limited resources for cash to be brought in at closing.  Yet there is no place on this form to show this detail.