Thousands of Countrywide Customers Will Get Refunds for Overcharges

Countrywide Home Loans overcharged thousands of customers before it was acquired by Bank of America (BOA). And now, following one of the largest FTC settlements ever, Bank of America is being required to pay refunds to former Countrywide customers. Technically, Bank of America will pay the money to the FTC, which will then disburse refund payments to more than 200,000 former customers of Countrywide.

Most of the overcharged customers were struggling with their payments at the time, and facing foreclosure as a result. Some were filing for Chapter 13 bankruptcy, as well. According to the FTC, Countrywide charged these people a variety of fees that were excessive in nature. The settlement and refunds only apply to customers whose mortgage loans were handled by Countrywide before it was acquired by BOA (in July 2008).

“Life is hard enough for homeowners who are having trouble paying their mortgage,” said FTC Chairman Jon Leibowitz. “To have … Countrywide piling on illegal and excessive fees is indefensible. We’re very pleased that homeowners will be reimbursed as a result of our settlement.”

Here’s what is truly despicable about all of this. Countrywide was one of the biggest subprime lenders during the housing boom. This means they gave mortgages to people who normally wouldn’t qualify for a loan — people with bad credit, high debt ratios, and shaky income. They did this by using a variety of “creative financing” strategies, such as the option ARM loan and the infamous stated-income loan (soon to be illegal).

In other words, Countrywide gave loans to people who had no business taking on mortgage debt. After all, the lender could simply sell the loans into the secondary mortgage market to limit their own risk. When such borrowers (predictably) fell behind on their mortgage payments, Countrywide cranked up the profit machine again, by levying huge fees.

From the FTC announcement: “Countrywide’s loan-servicing operation deceived homeowners who were behind on their mortgage payments into paying inflated fees — fees that could add up to hundreds or even thousands of dollars.”

Learn More About Countrywide Refunds

If your mortgage loan was serviced by Countrywide Home Loans before July 2008 (and you went through default, foreclosure or bankruptcy at the time), then you may be eligible for a refund through this settlement. According to the FTC’s settlement fact sheet, you don’t need to do anything. They will send notices in the mail to all customers who are eligible for the refund. See the video below for details.

Countrywide, Bank of America, and Reasons to “Shop Locally”

Still not shocked by this corporate malfeasance? Try this one on for size. Countrywide also created a subsidiary to hire out lawn-mowing services, for properties that were in default. They marked up these services by upwards of 100%, and then passed the marked-up fee to the defaulting homeowners.So let’s recap. Countrywide gave loans to many people who were ideal candidates for foreclosure. Then they charged these people excessive fees for missing payments. Lastly, they charged them seriously marked-up fees for lawn mowing, property inspections and other services. Let me remind you that Countrywide is now part of Bank of America.It’s something to consider, the next time you’re in the market for a mortgage loan.

87% of Home Buyers Plan to Use an FHA Home Loan

The Home Buying Institute is conducting a survey to measure the popularity and usage of FHA home loans. The first phase of the survey revealed that most home buyers plan to use an FHA home loan to finance their purchase.

The survey was presented to more than 12,000 readers, through the Home Buying Institute website. Of those who responded, 87% said they were planning to use an FHA loan to finance their home purchase.

FHA usage indicator
Chart: Most home buyers surveyed are planning to use an FHA loan. Image permission

Definition: An FHA home loan is a mortgage loan that is insured by the Federal Housing Administration, which is part of HUD. This insurance protects lenders from losses resulting from borrower default (when the borrower stops paying). With this kind of protection, the lenders bear less risk. Loans must meet certain requirements established by FHA to qualify for insurance.

Survey Details: Phase one of this survey was presented to more than 12,000 visitors to the Home Buying Institute website, over a one-month period. The first question in the survey was: “Do you plan to use an FHA loan when buying a home?” Eighty-seven percent of respondents said yes, they were planning to use an FHA home loan.

Reasons for Using an FHA Loan

Those who answered “yes” to the first question were then asked about their primary reasons for using an FHA loan. Here are the results of that follow-up question:

  • 53.8% said they wanted to use an FHA home loan for the smaller down payment. *
  • 19.2% said they thought the overall qualification process would be easier.
  • 13.5% said they previously had trouble qualifying for a conventional loan.
  • 7.7% said they had low credit scores.
  • 5.8% felt their income was too low to qualify for a regular loan.

* Borrowers who use FHA loans can put as little as 3.5% down. Conventional loans typically require a larger down payment. According to our survey, this is the biggest motivator for home buyers.

Reasons for using FHA loans
Chart: For the 87% of respondents who said they planned to use an FHA loan, these were the primary reasons given. Image permission

This survey suggests further growth in the FHA’s market share, which has already grown considerably in recent years. In the first quarter of 2010, almost half of all home buyers used an FHA loan to purchase a home. Brandon Cornett, publisher of the Home Buying Institute, expects that number to rise:

“Each month, we receive more than 200 email questions from home buyers. The frequency of FHA questions has increased steadily since the end of 2009. That’s what prompted the survey. The down-payment priority is not very surprising, when you think about it. A lot of people lost their savings during the recession, so they’re not in a position to plop down ten to twenty percent on a down payment. FHA loans have also been in the news a lot lately, due to various program changes. All of these things point to a continued rise in FHA usage.”

FHA Fact Sheet: In response to this survey, we have created an easy-to-read fact sheet about FHA home loans. It explains the pros and cons, the eligibility requirements, and the basic steps needed to apply. You can download the fact sheet for free, in Acrobat PDF format, on this page.

Reasons for Not Using the Program

Of those who said they did not plan to use an FHA loan, the following reasons were given:

  • 57.1% said they did not know enough about the FHA program.
  • 28.6% said they had excellent credit and enough saved for a down payment.
  • 14.3% said they tried to use an FHA loan before, but got turned down (reasons not given).

Related coverage from this website:

Summary of changes to the FHA program (2010)

Minimum down payment could rise to 5%

Image permission: You may use any of the graphics in this article to write a news piece of your own, provided that you cite the source. A link back to this page would be appreciated.

H.R. 4173 to Eliminate Stated-Income Mortgage Loans

Austin, TX – U.S. Housing News — The current version of the financial reform bill (H.R. 4173) would eliminate certain types of high-risk lending practices. For one thing, it would outlaw stated-income mortgage loans and make income-verification mandatory.

income verificationEver since the mortgage crisis began in 2008, fewer banks have been offering stated-income mortgage loans. That number could soon shrink to zero, if House Resolution 4173 becomes law.

This bill, currently called the Restoring American Financial Stability Act of 2010, will result in sweeping reforms of the financial-services industry. It includes an enormous list of reform measures, affecting everything from debit cards to mortgage loans. The current version of the bill is well over 1,000 pages, a testament to its far-reaching scope.

The differences between the House and Senate versions still have to be resolved, but final passage of the bill appears likely. According to the Washington Post: “Crucial differences … must be resolved in a House-Senate conference committee, which is expected to begin meeting soon after the Memorial Day recess.”

Most of the media outlets have been focusing on the new restrictions for derivatives trading. That kind of thing is off the radar of the average home buyer (most of whom don’t even know what a derivative is). But there are also some major changes being proposed that would affect the primary mortgage market. In short, there will be fewer mortgage products available.

Stated-income mortgage loans are first on the chopping block. These are also referred to as no-doc loans. This is where the lender allows the borrower to simply “state” his or her income, instead of verifying it through documentation.

At the height of the housing boom, from the mid 90s to early 2000s, there were many lenders offering stated-income mortgage loans. These were the days of easy credit that produced a wide variety of “exotic” mortgage products. But most lenders stopped offering such loans after the bubble bust in 2008. If the bill passes, such loans would be outlawed entirely.

H.R. 4173 Would Eliminate the Stated-Income Mortgage (Sensibly)

Section 1074 (b) of the Restoring American Financial Stability Act states the following:

“No creditor may make a loan secured by real property [i.e., a mortgage loan] unless the creditor, based on verified and documented information, determines that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan … and all applicable taxes, insurance, and assessments.”

The bill also outlines the steps mortgage lenders must take to verify a person’s ability to repay. They must review the borrower’s credit history, current income, current financial obligations, and debt-to-income ratio. To verify the borrower’s income, the lender must review IRS W-2 statements, tax returns, bank records, and payroll receipts / pay stubs.

Of course, all of this can be filed under ‘R’ for Responsible lending. This is the kind of verification process that should take place, across the board. But during the heyday of housing mania, many lenders created “side doors” for people with bad credit and/or shaky income. The stated-income mortgage loan is a prime example of this look-the-other-way mentality.

If this bill becomes law, we can finally say good riddance to such reckless lending practices. At least until the next round of exotic mortgages come onto the scene.

Changes to FHA Loan Program – And a New Fact Sheet

Austin, TX – U.S. Housing News — If you’re having trouble keeping up with all of the changes to the FHA loan program, you’re not alone. We receive at least one email per week from confused home buyers, regarding the FHA changes they’ve heard about. So we decided it was time to compile all of the recent FHA program changes into one place. We have also created a fact sheet about these loans, and you can download it here.

FHA Home Loans, Defined

The Federal Housing Administration (FHA) is an agency of the federal government. It falls under the Department of Housing and Urban Development. The FHA’s primary mission is to insure mortgage loans made by approved lenders within the United States and its territories. The FHA does not lend money directly to home buyers. Rather, it insures loans by lenders in the private sector. This kind of government backing encourages lending to a wider segment of the populace (including people who wouldn’t otherwise qualify for a home loan).

Changes to the FHA Program

So why have there been so many FHA changes in recent months? These changes are primarily designed to strengthen the FHA’s capital / cash reserves. These reserves dipped to an all-time low recently, following the housing and mortgage crisis of 2008 – 2010. This severe loss in capital was the result of high numbers of mortgage defaults and foreclosures (i.e., bad loans). The FHA insures many of the mortgage loans made by lenders within the private sector. When those loans started defaulting in record numbers over the last couple of years, the FHA’s capital reserves became severely depleted.

Toward the end of 2009, FHA commissioner David Stevens said: “I don’t want to leave the impression that the reserves are adequate … There are real risks to the FHA and we are aggressively addressing those real risks with real reforms.” He explained that the FHA is going to change the way it does business, mainly by reducing the risks it has endured in the past.

So how does all of this translate into action? Here are some changes to the FHA loan program that have already been implemented:

  • Borrowers who use FHA home loans are required to pay an upfront mortgage insurance premium. In 2010, this premium was raised from 1.75% of the purchase price to 2.25%, an increase of 50 basis points. This increases the amount due at closing.
  • The FHA has also requested permission from Congress to raise the annual mortgage insurance premium. This would offset some of the upfront insurance costs, described above. Overall, it would increase the cost of the loan.
  • In the past, the FHA has not had any hard and fast rules about credit scores. It was mostly left up to the lenders. But this will change in 2010. Going forward, borrowers must have a FICO credit score of at least 580 to qualify for the 3.5% down payment. Borrowers with scores below 580 will have to make a down payment of at least 10%, which is a significant difference in upfront costs.
  • Another big change to the FHA loan program has to do with seller concessions. HUD has reduced the amount of seller concessions from 6% to 3%. This means sellers will not be allowed to contribute as much money toward the buyer’s closing costs (when an FHA mortgage is being used).

Possible Changes in the Future

The down payment situation may change again in the near future. There is currently a proposal in Congress to raise the down-payment requirement to 5% across the board. As of May 2010, this bill (H.R. 3706, the FHA Taxpayer Protection Act) was still in a committee status. No voting has taken place yet. We are watching this closely, and we will report back if and when the proposal becomes law.

Download Our FHA Reference Sheet

We recently published a reference sheet on the FHA home loan program. It includes some of the changes mentioned above, as well as other helpful information for home buyers. If you are thinking about buying a home with one of these loans, you will find our fact sheet helpful. Learn more here

Disclaimer: This news story contains time-sensitive information about changes to the FHA home loan program. Future changes and modifications could make portions of this article obsolete. Please make note of the publication date for this story. If you want the most current information available, you can visit the news release section of the HUD website.

Bank of America Loan Forgiveness Could Shrink Mortgages for Thousands

Austin, TX – U.S. Housing News — Bank of America has announced a loan forgiveness program that could shrink the mortgages of 45,000 homeowners.

The goal of the program is to motivate struggling homeowners to stay in their homes, avoiding the foreclosure process entirely. By forgiving a portion of the principal amount owed, the Bank of America program would also make it financially easier for homeowners to stay afloat.

How Principal Forgiveness Works

Up until now, most of the loan modification programs used by banks have focused on the interest rate and term of the loan. But the banks were reluctant to reduce the actual amount borrowed (the principal). That is what this new program is designed to do — it forgives part of the loan principal to help struggling homeowners avoid foreclosure. Bank of America said that it is willing to forgive up to 30% of the principal for qualifying borrowers.

In a press release issued on Wednesday, BOA president Barbara Desoer cited the lack of motivation among homeowners with underwater mortgage loans. She said the company “has found that many homeowners who owe considerably more on their mortgages than their homes are worth [i.e., underwater] are reluctant to accept a solution … without an accompanying reduction in the balance due on the loan.”

Desoer’s comments allude to the fact that many underwater homeowners choose to walk away from their mortgages, choosing foreclosure as their only palatable option. The loan forgiveness program gives these people some added incentive to stay in the home, and to keep making payments. Thus, it’s a favorable option for bank and borrower alike.

Who is Eligible for the Program?

According to information released by BOA, the loan forgiveness program focuses on people who used subprime mortgages and option ARMs through Countrywide Home Loans. If you recall, Bank of America acquired Countrywide back in 2008. BOA estimates that they may be reducing principal for up to 45,000 customers who meet these criteria, and that it could eventually forgive more than $3 billion worth of debt.

Additionally, the mortgage must be at least 60 days delinquent with a loan-to-value (LTV) ratio of 120 percent or higher. In other words, the amount owed on the loan must be at least 120 percent of the home’s current value. So it would seem that a property appraisal would be required, in order to determine the home’s current value (though there is no mention of this in the Bank of America news release).

We suspect that other lenders are watching this program closely, and that they may offer a similar option for their customers in the future. But as of right now, only Bank of America has a loan forgiveness program that deals with the principal amount owed.

Fed’s Actions Could Influence Lending Rates in 2012

Editor’s note: This story contains outdated information about interest rates and mortgage trends. For more current information, please visit our rate forecast page.

In December 2011, the Federal Reserve stated that it plans to keep its benchmark lending rate near zero at least through 2013. While mortgage rates aren’t tied directly to the Fed’s actions, they are certainly influenced by them. As a result of this announcement, most analysts are predicting that mortgage rates will remain low throughout all of 2012. How low? Well, they’ve been hovering around 4% for months (in the 30-year fixed category). At present, we have every reason to believe that this trend will continue for much, if not all, of 2012.

You’ll find more housing market predictions on this page.

The rest of this story is presented in its original form, first published in 2010. If you would like to access the most recent information on this website, please use the search tool provided at the top of the page.

Mortgage rate predictions are never written in stone, because nobody can truly predict the future (no matter how many titles or degrees they might have). But there are certain factors that may affect mortgage rates through the rest of 2010 and beyond. For instance, the federal reserve will stop buying so many mortgage-backed securities in March 2010. Many financial analysts agree that this move could contribute to rising interest rates.

Rate Predictions from Around the Web

Here are some other mortgage predictions for 2010 and beyond:

  • In an interview with MarketWatch, Greg McBride predicted that interest rates would rise by about half a point (from the current level of 5%, and after the Fed stops buying up securities).
  • “Still, all of the experts agree that mortgage rates will climb. Their projections are for a gradual run up to between 5.5% and 6% by December. Brinkman’s projection is a rise to 5.8%; Cutt’s is to 5.75%.” –CNN Money
  • “The consensus of almost all the analysts [in a CNBC forum] is that mortgage rates will rise next year … The forecast for next year’s mortgage rates is that by the end of the second quarter, 30 year fixed rate loans will average between 5.37% to 5.5%.  It is expected that by year end 2010, rates will be more in the 5.5% to 6% range.” –Shelby Bateson, loan officer
  • “If you told me by the end of 2010 a 30-year rate was at 6 percent, that sounds about right. I don’t think there’s any question rates are headed up.” –Mark Zandi from Moody’s
  • In December of 2010, the Mortgage Banker’s Association released its outlook for 2010. They predicted a continued rise in rates over the coming months, perhaps up to 5.7% by year’s end. –U.S. Housing News
  • An advisory committee for the American Bankers Association believes that rates will hit 5.5 percent by the second quarter of 2010. Of course, this prediction was from June 2009, so much has changed since then.
  • “We expect interest rates to be lowest in the early part of the year … with 30-year fixed-rate mortgages hanging around the 5% mark … rates will nudge closer to 6% than 5% for the final two quarters of 2010. –HSH.com
  • “The average rate on a 30-year, fixed-rate mortgage … could climb to 6 percent by the end of 2010, if not sooner, according to giant mortgage financier Freddie Mac.” –Washington Post

Taking an average of the predictions listed above (and others we found during our research), we come up with the following consensus: Mortgage rates will likely climb to around 5.75% by the end of 2010.

Putting Mortgage Predictions in Perspective

From a home-buying perspective, mortgage rates are only piece of the puzzle. Home prices are another major factor that should influence your decision making. In some cases, these two things can offset each other. For example, for the second and third quarter of 2010, home prices are expected to dip in many cities across the U.S. This is a direct result of housing inventories in general, and foreclosures in particular. When prices drop at the same time that mortgage rates are rising, a home buyer could still come out ahead in the long run.

The bottom line — you must factors in all of the variables when planning your purchase. Keep this in mind when reading about mortgage rate predictions for 2010 – 2011.

As a home buyer, you should also realize that you may or may not qualify for the best interest rates a lender has to offer. In order to get the lowest rates, you will probably need the following things in your favor:

  • A credit score of 750 or above (some say 740, others say 760)
  • A loan-to-value ratio of 80% or lower (making a down payment for the rest)
  • You might even have to pay a point at closing, to secure the best rate

We will bring you additional mortgage rate predictions for 2010 as they become available.

HUD Publishes New Booklet on Real Estate Settlement Costs

As of January 2010, mortgage lenders are required to use a new form when providing Good Faith Estimates. The new standardized form is designed to give home buyers a clearer picture of their real estate settlement costs, also known as closing costs.

To go along with these new rules, the Department of Housing and Urban Development (HUD) has updated its consumer guide to mortgage settlement costs. The booklet can be downloaded in PDF format from the HUD website.

As a first-time home buyer, it’s crucial that you understand (A) what a Good Faith Estimate is and (B) how it relates to the costs of your loan. So let’s start with some key definitions:
New GFE form
Good Faith Estimate — Also referred to as a GFE, this is a document that mortgage lenders give to borrowers to help explain the full costs of a loan. You would receive this document during the loan application process. You can see an example of a Good Faith Estimate form to the right.

Real Estate Settlement Costs — Also referred to as closing costs, these are the various fees and charges a home buyer pays to a lender. They include mortgage application fees, origination fees, charges for credit checks, and more. These costs can add up to $2,500 or more, and most of them are due on closing / settlement day.

Here’s what the aforementioned HUD booklet says about the new GFE form:

“The GFE is a three page form designed to encourage you to shop for a mortgage loan and settlement services so you can determine which mortgage is best for you. It shows the loan terms and the settlement charges you will pay if you decide to go forward with the loan process and are approved for the loan … The GFE may be provided by a mortgage broker or the lender. Until they give you a GFE loan originators are only permitted to charge you for the cost of a credit report.”

If you click the GFE image to the right, you’ll see another important aspect of it. In the loan summary section, the document tells you if your interest rate will rise in the future. This has to do with adjustable-rate mortgage (ARM) loans. If you’re using an ARM loan, this document will tell you (A) how much the rate may increase and (B) when the first adjustment will occur. These are very important details, because they affect the size of your monthly mortgage payment.

We highly recommend that you download the new HUD booklet on real estate settlement costs, and that you read it until you understand it. It gives you the information you need to make smart mortgage choices. Here is the HUD download page again.

Changes to Down Payment Rules on FHA Home Loans

As the Federal Housing Administration continues to struggle with funding issues, additional changes to the FHA home loan program are being instituted.

Last month, we wrote about some proposed changes to the FHA home loan guidelines that would require larger down payments across the board. That particular proposal is still with the House Committee on Financial Services. So there’s nothing new to report on that front. Earlier this week, however, the Department of Housing and Urban Development (HUD) announced some other changes to FHA loan guidelines.

Significant Changes Include the Following:

The FHA will increase the mortgage insurance premium (MIP) required on all home loans issued through this program. This premium is one of the components that are collectively referred to as closing costs. Starting this spring, the MIP will increase from 1.75% to 2.25%. This will increase the total amount of closing costs for home buyers who use FHA loans to finance their home purchase.

Other FHA changes relate to the borrower’s FICO credit score. In short, if a borrower has a FICO score below 580, they will be required to make a larger down payment on the loan — a down payment of 10%. Buyers with scores above 580 can put as little as 3.5% down. The FHA has made this change to protect themselves from the higher lending risks that are associated with subprime (bad credit) borrowers.

They have also reduced the amount of seller concessions from 6% to 3%. This means sellers will not be allowed to contribute as much money toward the buyer’s closing costs (when the FHA loan is being used).

HUD Secretary Shaun Donovan said that additional details would be released before the end of January. We will update this story as soon as these details are available.

What It Means to Home Buyers

The most significant change is the new down-payment requirement for borrowers with less-than-ideal credit. But this is also something that home buyers can control, by taking proactive steps to improve their credit scores. The difference between a 3.5% and 10% down payment is significant, especially for a first-time buyer who doesn’t have a lot of cash to put down.

On a $200,000 mortgage loan, the difference stacks up this way:

  • 10% down payment = $20,000 (due at closing)
  • 3.5% down payment = $7,000

If this home buyer had a FICO score below the new 580 cutoff, he or she would have to bring an extra $13,000 to the table on closing day. If that doesn’t motivate you to improve your credit, then nothing will.

Summary of Mortgage Changes for 2010

This page provides a summary of mortgage industry changes that are relevant to home buyers. We will update this page throughout 2010, in order to keep it current. Last update: 12/28/09

There have been more mortgage-related changes in the last six months than in the previous six years. The housing crisis and economic recession are the main reasons for this. What does this mean for first-time home buyers? It means they will face a different real estate market in 2010 than what we’ve seen before.

Here’s what home buyers should know about mortgages changes in 2010:

Higher Credit Scores Across the Board

In 2010, home buyers will need higher credit scores than they would’ve needed a few years ago. There are two qualification “tiers” when applying for a mortgage loan. You need a certain score just to be approved for the loan, and you need a certain score to qualify for the lowest rates available. (Sometimes you’ll reach the first mark, but not the second.) Both of these cutoff points have gone up over the last year or two.

The exact score required will vary from one lender to the next, so we can only generalize things here. But it’s safe to say you’ll need to be above the 620 range to be approved for a mortgage, and above the 760 – 780 range to qualify for the best rates available.

There are several reasons for this change within the mortgage industry. For one thing, lenders are less willing to take risks on borrowers with bad credit. That’s partly the reason we had a mortgage crisis to begin with. Secondly, Fannie Mae (a company that buys loans from direct lenders) recently increased its minimum-credit-score requirement from 580 – 620. This means that lenders who want to sell their mortgages to Fannie Mae must enforce that same requirement when approving loans.

Note: This, along with the down-payment factor below, will be one of the most common reasons for mortgage rejection in 2010. So before you start applying for loans or talking to lenders, you should find out what your credit score is — and work on fixing it, if necessary. On the main Home Buying Institute website, you’ll find a library of more than 100 articles on credit score improvement.

Stricter Requirements for Down Payments

The days of zero-down mortgages are over. See the “extinction” notices further down the page. In the past, mortgage lenders were willing to finance 100% of the purchase price, giving home buyers who could not afford a down payment a path to homeownership. Those days are over — for 2010 at least. Depending on the type of loan you obtain, you’ll need a down payment of 3.5% to 20%.

This is actually a good thing, though many first-time buyers don’t realize it. The more money you put down on the purchase, the more equity you have from day one. People who make larger down payments are also statistically less likely to default on the mortgage later on.

Changes to FHA Loans in 2010

Mortgage loans insured by the Federal Housing Administration (a.k.a. FHA loans) are very popular with first-time home buyers. You can put less money down with one of these loans, and the qualification process is generally easier than with a conventional loan. But the FHA’s monetary reserves have dwindles over the last couple of years, so there have been some key changes to this loan program. Here’s what home buyers should know about FHA loans in 2010 …

For one thing, you’ll have to make a larger down payment. The previous requirement was 3% of the purchase price. It was recently increased to 3.5%. If certain members of Congress get their way, the down payment requirement could increase to 5% (though the “jury” is still out on that).

Other Changes in the Mortgage Industry

Here are some other mortgage changes that will affect borrowers / buyers in the 2010 economy:

  • There have been quite a few bank failures and mergers over the last few years, especially at the national level. So home buyers will find fewer options when shopping for a loan at that level. In addition to the “big banks,” home buyers should look into local banks and credit unions. In some cases, you can get a lower rate and better service at the local level.
  • Most of the so-called “exotic” mortgages have become extinct. This includes a wide variety of creative financing tools, most of which were designed to put unqualified borrowers into home loans. Zero-down mortgages and interest-only home loans fall into this category. (Editor’s note: These dangerous mortgage strategies should be illegal in the first place, but we will settle for having them disappear.)
  • The Federal Reserve has stated that it will keep interest rates at their current level for the foreseeable future. As a result, mortgage rates could remain low for most of 2010. They are currently hovering in the 5% range and might stay there for the next few months.

We will update this page as other changes occur within the mortgage industry.

New Rules for Good Faith Estimates – Effective January 2010

Starting in January 2010, mortgage lenders will face some new rules regarding the “good faith estimates” they give out to borrowers. The goal is to give home buyers a more accurate picture of the costs they will incur.

Editor’s Note: This is an update to an older news story, which will come to fruition in the next month. These changes were actually put in motion at the end of 2008. The changes take effect at the beginning of 2010, two weeks from now.

Before we go any further, a definition is in order:

New GFE formGood Faith Estimate (GFE) — An estimate, provided by a mortgage lender, detailing the full costs of a loan. Among other things, it must include the interest rate and all other costs and fees associated with the loan (i.e., closing costs).

In accordance with the Real Estate Settlement Procedures Act (RESPA), the good faith estimate must be given to you within three business days of your loan application. This helps borrowers comparison-shop between different lenders.

There are two key parts to this statement — “estimate” and “good faith.” Because it’s an estimate, it may be slightly different than the amount you end up paying at closing. But it’s also supposed to be made in “good faith,” which means the lender has tried their hardest to be accurate and forthcoming. But this is not always the case.

In the past, these estimates have been, shall we say, less than faithful. Mortgage lenders have been known to downplay various fees, in order to make the loan seem more affordable up front.

Often, home buyers are surprised to find additional costs and fees on closing day — items or amounts that were not disclosed in the good faith estimate. Sometimes, even the true structure of the loan is not fully disclosed. This is a criminal act, plain and simple.

Changes to Good Faith Estimate Paperwork

In truth, this has been a problem for a long time. So these recent actions to increase the accuracy of GFEs are long overdue. These estimates will never be 100% accurate (they are called “estimates,” after all), but these new changes may at least reduce the willful omission of costs. Time will tell.

The new guidelines are intended to increase the accuracy and completeness of GFEs, partly by mandating the use of standard forms and disclosures.

The Department of Housing and Urban Development (HUD) will require usage of the new standardized form for good faith estimates, starting on January 1, 2010.

The first document above (the GFE) is the one discussed in this article. The second document (the HUD-1 Statement) is one that you’ll get a few days before the actual closing.

What This Means to Home Buyers

As a home buyer, one of the best things you can do is to save as much money as possible. You’ll need money for a down payment, closing costs on the mortgage, moving expenses, and probably a few other things you’re not even thinking about right now.

While the Good Faith Estimate might be more accurate in 2010, it’s still only an estimate. Whatever amount of closing costs your lender discloses, you should prepare yourself for a higher amount on closing day. If their GFE is accurate, great! But if the actual costs are higher (which is so often the case), you will at least be prepared for it.