Are the "Junk" fees really going to go?

You know how I feel about "junk" fees and frivolous charges appearing at the last moment on a settlement statement.

An excellent article from Ken Harney at the Daily Herald regarding the new HUD 1/GFE scheduled for January 1, 2010.

Click here for the article

Take the OAITA online survey!

If you are a homeowner and/or borrower and recently closed a real estate purchase or refinance transaction in the last year, please complete the online survey put together by the Ohio Association of Independent Title Agents (OAITA).

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RESPA reform receives mixed reviews

The Real Estate Settlement Procedures Act (RESPA) underwent a facelift one year ago, with changes expected to take effect on January 1, 2010. The Department of Housing and Urban Development’s (HUD) regulation, designed to control costs and prevent deception in home closing procedures, will now go one step further in protecting consumer rights. It will require a three-page Good Faith Estimate (GFE) form presented to buyers up front, disclosing key loan terms and estimated closing costs.

The GFE format will be easy to read and compare with the HUD-1 Settlement Statement, where actual costs are outlined. Corresponding lines on the GFE and HUD-1 will be labeled for comparison purposes. This ease of use is one of the major differences between the new GFE and old GFE form. Additionally, the form is now standardized, fees are grouped together, and there are fewer leniencies for variations in the numbers presented on the GFE at the beginning of the process and the HUD-1 at the end.

This marks the first major change to home closing policies and procedures in nearly 17 years. Government officials say such changes were necessary due to the recent mortgage crisis, which many link to complicated terminology and financial surprises that befuddle would-be homeowners.

“The whole idea of RESPA reform, expressed by then-President Bush and the principals at HUD who were there at the time, was a desire to get consumers a more transparent, clearer and more accurate settlement transaction,” said Phil Schulman, D.C.-based K&L Gates firm partner, in the May edition of RESPA News Monthly.

“The whole idea was to try to create a system that would simplify the process, provide greater transparency and most important, try to get the consumer more accurate figures about what this transaction was going to cost them three days into the process, rather than at the closing table.”

Schulman added, however, that the costs of training staff to follow the new regulations and how to fill out the new GFE form could strain mortgage lenders who are already strapped for cash. President Barack Obama has decided to keep the RESPA reforms in place, with the exception of one provision. He overturned the “required use” clause, which forbade home builders from offering buyers incentives in exchange for the use of certain partnering mortgage and title companies.

The new changes, effective January 1, are widely considered very positive for consumers, with upfront language on details that have previously stumped home buyers. It clearly presents any “gotcha” terms and conditions previously buried in the fine print or vaguely stated with confusing industry lingo. The following are some of the key changes expected to benefit home buyers:

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  Home buyers will now know up front the term, type and interest rate of their loan, whether the rate is adjustable or fixed, whether there is a prepayment penalty, and exactly how much money is required for closing costs.
  
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  The GFE must be presented to home buyers within three days after receipt of all necessary, relevant information.
  
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  The new GFE form is more concise, only three pages with one additional page of instructions on how to read and understand the form.
  
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  Because fees are grouped into clear categories, “junk fees” will be harder to sneak in. Total estimated closing costs will appear clearly on the front page, for easier comparison of various loan offers.
  
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  At closing, HUD will very closely control which fees can or cannot vary from the amount presented on the GFE in the beginning of the process. If allowing a fee to change, HUD will control how much the fee can change.
  
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  Overall, total closing costs are expected to drop by nearly $700 on average per transaction.
  

At this time, the rule contains many requirements and limitations pertaining to it. For example, the loan originator must provide a GFE within three business days of the borrower's application and cannnot charge more for the GFE than the cost of the credit report. Generally, a revised GFE cannot be issued unless there are "changed circumstances". Change circumstances include the acts of God, war, disaster, other emergencies and situations where information particular to the borrower or the transaction either changes or is later found to be different from what was known at the time the GFE was provided.

Of particular interest, the GFE sets forth three categories of settlement charges and states what changes will be tolerated on the HUD-1.

• Cannot Increase (Zero Tolerance).  The following cannot increase at settlement:
• Loan origination charge or adjusted origination charges (after the interest rate is locked)
• Borrower's credit or charge (points) for the interest rate chosen (after the interest rate locked)
• Transfer taxes
• Can Increase up to 10% at Settlement.  The aggregate total of the following charges can increase up to 10% at settlement:
• Required services that the lender selects
• Title services and lender's title insurance (if the lender selects them or the borrower uses companies that the lender identifies)
• Owner's title insurance and required services that the borrower can shop for (if the borrower uses companies which the lender identifies)
• Government recording fees
• Can Change.  The following can change at settlement:
• Required services that the borrower can shop for, title services and title insurance (if the borrower does not use companies that the lender identifies)
• Initial deposit for escrow account
• Daily interest charges
• Homeowner's insurance

HUD has also determined that a loan originator may cure a violation of the tolerances simply by reimbursing the borrower the amount by which the tolerances were exceeded. :)

Mortgage broker vs. bank

Shopping for a home loan? You’ll have a different experience depending on where you go – a bank or a mortgage broker. Is either one better than the other? Not necessarily, but there are pros and cons to each and it’s important for consumers to understand the differences before proceeding.

Banks
Loan officers at a bank or credit union can offer access to a wide variety of loans, all originating from the same financial institution. Working with local banks can mean faster loan processing because there are fewer questions about the specifics of local property, the local real estate market, and local standard operating procedures.

Mortgage broker
A mortgage broker scouts out the best deals for clients, whether local or long-distance. They work on a fee per transaction and may be able to offer more options. Because they act as the liaison between the home buyer and the lender, mortgage brokers may be able to secure better loan terms or interest rates. They may also be able to help those purchasing unique or commercial property, or those with poor credit whose loans may not have been approved by other lenders. Mortgage brokers may be able to provide a more specialized loan that best suits your need.

Always choose the mortgage loan that offers the best interest rate, terms and conditions. Although they are working for an additional upfront fee that you must pay, brokers can prove well worthwhile in the long run for the money they might save you in lower interest fees.

Pros and cons of reverse mortgages

Reverse mortgages are receiving a lot of attention lately. Not only are they seeing increased popularity among cash-strapped elderly homeowners, but they are currently undergoing congressional scrutiny for their feasibility, practicality and, in some cases, their legitimacy. Reverse mortgages are, by and large, legitimate deals although there are some concerns about their possible use as a tool to prey on the elderly poor who have much-needed money tied up in home equity. While Congress sorts out the matter and identifies any necessary regulatory tweaking, consumers are left to fend for themselves. So before jumping on the reverse mortgage bandwagon, it’s important to know the pros and cons.

Pros
Reverse mortgages offer flexible payout options, including lump sum, equity line or monthly payments. A person can choose the best option to fit their financial picture, or a mixed combination of the three options.
Anyone at least 62 years of age may be approved for a reverse mortgage, dependent upon factors like the applicant’s age, current interest rates, and the amount of home equity. Access to home equity can supplement social security income or help pay for costly medical expenses.

Cons
Fees, interest rates and closing costs are often higher with reverse mortgage loans. Many people view their estate as their legend, a parting gift they can leave for loved ones, so borrowing against their home has emotional repercussions as well. Furthermore, assuming the debt is not paid off before the homeowner’s death, surviving family members will have a more complicated time settling the estate. If the home stalls on the real estate market or is “underwater,” meaning more is owed on the home than it is worth, surviving family members may choose to let it go into foreclosure.

Options
Senior citizens may consider a simple refinance of all or a portion of their home. This allows access to cash with lower upfront fees, but does require mortgage repayment with interest, taxes and insurance. Seniors may prefer to avoid the burden of a monthly payment, even if it will be relatively low. Either way, professional consultation from an independent financial advisor should be sought first before making a decision.

IRS plans to monitor mortgage payments more closely

The Internal Revenue Service (IRS) already monitors mortgage-interest payment information to identify people who likely should have filed a tax return, but failed to do so. In the future, this data provided by banks will also help identify taxpayers who may be underreporting their income.

The IRS program could lead to audits for those who don’t file tax returns at all, or who report less income than was paid in mortgage interest, according to a recent announcement by the U.S. Department of Treasury.

Experts point out potential problems with the plan. It doesn’t account for unemployed individuals who use cash savings or credit cards to continue making mortgage payments, even while their income source is gone. On paper, these individuals could be categorized as tax evaders, whereas reality paints a starkly different picture.

“We shouldn’t presume that these struggling families are tax cheats just because they continue to make their mortgage payments despite losing their income,” Rep. Charles Boustany (R-La.) told the Wall Street Journal. (1)

The Treasury, however, says that there could be as much as $1.4 billion in unreported or underreported income taxes, penalties and interest. At the very least, there are enough non-filers who paid over $20,000 in mortgage interest to cause concern. Federal officials are especially mindful of the new plan as a best effort to monitor any small business owners who operate primarily with cash, as is often the case in the construction industry. The IRS program expansion is expected to take effect by 2011.

footnote: 1. Vaughan, Martin. “IRS to mine payment data on mortgages.” Sept. 1, 2009.

Builders Should Not Own Title Companies

Another hat tip to our friends at http://www.caare.org/ for another article explaining the lack of transparency with builders and their customers.

Builders want to continue to force consumers to use their in-house title companies. Allowing a builder to own a title company is little different than allowing a builder to determine if his own title is any good. Builders recently pummeled HUD with a mountain of letters and a lawsuit to protect this anti-competitive, anti-consumer and manipulative arrangement.

New construction closings are likely the most complex and risky transactions a consumer or lender will ever do. The title issues are enormously complex, fraud abounds and the potential for coercion and bait and switch is huge. And it is the title company that must sort through the complex purchase agreements to properly represent them on the settlement agreement. It is the title company that must uncover title defects created by the builder, mechanics liens that the builder hasn't paid and handle situations where the buyer and builder disagree. Of course builders want to own the title companies that make these decisions. What better way to protect their investment.

It doesn't take long to imagine a routine real life scenerio where a builder might abuse his ownership of a title company. Here are a few:

• Sub-contractors have filed mechanics liens on the property and the builder disputes them.


• There is a blanket underlying mortgage on the entire development and the builder doesn't want to payoff the part due to release the subject property.


• The builder is in financial difficulty and the title company is a perfect bank to "borrow" money.

Residential new construction is already a problem for consumers in that the purchase agreements are best described as contracts of adhesion and offer consumers no meaningful protection whatsoever. The forms are typically custom forms in excess of 20 pages that would cost a fortune to even have an attorney review. Consumers are already at a severe disadvantage.

In addition, title companies are responsible to collect and disburse funds in an unbiased manner that follows the instructions in the purchase agreement. Is there any possible way to call a builder's title company unbiased?

And if the builder is trying to cover up title defects such as unpaid mechanics liens or unpaid mortgages, what better way to do that than by owning your own title company?

The other problem is that builders coerce buyers to use their biased title companies by offering fake discounts that exceed the price of the title work often by a factor of 5 or more. Free rooms, $10,000 in discounts, free granite counter tops are all things that we have seen. When the title fees are only $1200 or so, the so called "incentive" to use their title company becomes more of a demand than a choice.

And if the builder is capturing all of the buyers' title work that comes through the door, what does that do to competition? Competing title companies that offer title work for less won't be considered because they would essentially have to pay the buyer $8,000 to match the benefit the consumer is getting from the builder. The discount is nothing more than a stick to whack the buyer with if the buyer refuses to subject himself to the risky proposition of allowing the builder to examine his own title.

Allowing builders to own a title company allows the builder to neutralize the safeguards that the title company is there to provide. If you're going to allow that to happen, it is CAARE's position that you would be better off not even examining title at all.

How much is your property really worth?

Knowing the value of your home is critical to making key financial or family planning decisions. The real estate market is on the rebound and some areas are recovering faster than others, so it’s important that your property analysis be local. There are several ways to research your home’s true value.

Check with local real estate experts

Check with an agent or broker who is familiar with comparable properties in the local area. They’ll know what you can expect for a home with similar features, age and location as yours. They’ll also know which property features are hot in the current real estate market, and you might even consider updating your home with those features to enhance its appeal. Local real estate experts might also have a good idea of when the market will be in even better shape than it is now, thus bringing a better price for your property.

Professional appraisal

A professional property appraisal will cost at least a few hundred dollars, but this detailed analysis could prove worthwhile if home value will play a part in making a major life decision. The appraisal is based on a combination of comparables and an in-person inspection. Known as “appraised value,” this estimated value of your property may be more or less than the “market value,” which is the dollar amount suggested by local real estate experts you’ve consulted. Unlike the appraised value, the market value takes into consideration such variables as buyers’ incentives and how quickly the seller needs to sell the home.

Network

Get out and visit open houses. This will be a great way for you to see first-hand the style and features of comparable properties. You will also be able to research the asking prices of these properties, and also meet realtors or brokers to help you sell your own property. Getting outside the “bubble” of your own home is a great way to figure out whether you can get more from the sale of your property – or in some cases, whether you’re expecting too much.

Research online

The Internet is full of resources to help you figure out your home’s value. Check the multiple listing service to see the values of comparable properties, if a realtor or broker isn’t already researching that information for you. There are also fee-based sites with software to provide property comparisons and home valuations.

When pricing your property and deciding whether to sell or wait, knowledge is power. Fortunately, a variety of tools are at your disposal to help ensure you get what your property is really worth.

CFPA proposal launches congressional tug-of-war

In the midst of the healthcare reform battle, another war is raging between President Barack Obama and Congressional Democrats. Consumer finance took center stage in early July with the Consumer Financial Protection Agency Act of 2009, a scaled-back version of Obama’s previous proposal.

The House Financial Services Committee proposal is structured very similarly, with a few key differences. Like Obama’s proposal, it will grant the new CFPA power to create and monitor regulations for products offered by the financial industry. Unlike Obama’s proposal, congress proposes to leave enforcement of the Community Reinvestment Act in the hands of offices like the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS), as opposed to the newly formed CFPA. Furthermore, congress does not propose a merger of OTS and OCC into a new regulatory agency called the National Bank Supervisory, as Obama proposed.

The congressional CFPA proposal is not without some internal squabbling among Democrats. Those serving on the House Energy and Commerce Committee protest that the Federal Trade Commission, which falls under that committee’s oversight, should retain regulatory power over non-bank financial products. Losing control over mortgage brokers and finance companies will significantly restrict the role of the FTC and thus the Energy and Commerce Committee, argued former committee Chairman Frank Dingell (D-MI).

Supporters of CFPA counter-argued that one agency with one mission to oversee the financial industry will repair some of the past damage done by the FTC’s historic lack of oversight. The bill, HR 3126, is currently under review by the committees of finance and energy and commerce.

I Believe (reprinted from Mike Pryor at ALTA)

(Reprinted with permission from Mike Pryor at ALTA - http://www.mikepryor.net/)

I was recently asked why I am so adamant about the need for a good title search.

Because…..

• I believe the cornerstone of property rights in the United States is based on a transparent and reliable method of providing constructive notice regarding those precious rights.
• I believe a good title search brings attention to areas of the public record that need correction, satisfaction or curative action.
• I believe that without the scrutiny and curative action resulting from a good title search, critical public real estate records in our country will fall into disarray.
• I believe that failure of confidence in the public records will inevitably lead to increased fraud and false claims against legitimate property rights.
• I believe corrupted public records will result in a reluctance or refusal of credit.
• I believe once the public records are damaged beyond any ability to prove unimpaired ownership, title insurance will become unaffordable for most consumers.
• I believe when a loan is conditioned on an unaffordable title insurance product or an unattainable proof of lien priority, economic prosperity is threatened.

Do you still wonder why I am so adamant about the need for a good title search?

Because….

• I believe the quality of a title search should be more than an “occasional” requirement for issuing title insurance.
• I believe consumers are entitled to disclosure of all title impairments of record, regardless of the insuring decisions.
• I believe a title policy issued on a poor (or non-existent) title search provides an illusory near term savings at a catastrophic long term price…both for consumers and title insurers.
• I believe our individual and corporate responsibility to the economic future of our children and grandchildren is violated every time we forego a good search in favor of a quick profit.
• I believe, as an industry, we should be protectors of good standards, not just servants to the avarice of mortgage markets that require “quick” at the expense of “good”.
• I believe those in the title business should learn from current business examples that the consequences of short cuts, regulatory failure and improper attention to risk are devastating.

Finally, I believe a good title search of good public records unleashes the power of asset leveraging and securitization in a way that, with restored diligence, can keep the American dream of home ownership alive for future generations.

That’s why I am so adamant about the need for a good title search.

Thanks for asking!

Mike Pryor
www.mikepryor.net