New GFE to reshape mortgage ethics?

On Jan. 1, 2010, a redesigned good faith estimate (GFE) will become effective and make mortgage shopping a little easier for borrowers.

The GFE is a disclosure of information about a mortgage transaction that lenders must provide within three business days of receiving an application. The existing GFE, which has been around as far back as I can remember, is really bad, setting the bar for improvement extremely low. The new GFE clears the bar by a comfortable margin, though it is far from perfect.

Clearer presentation of critical mortgage features: The existing GFE, and its companion Truth in Lending (TIL) disclosure, are so poorly designed that borrowers who are distracted and feel under pressure when they are exposed to disclosure documents often miss what may be critically important to them.

This could be that the interest rate on their loan can increase, that the balance can increase, that their loan has a balloon payment, or that it has a prepayment penalty. With the new GFE, it will be very difficult for a borrower to miss these features because they are prominently displayed on page one in a nice summary table.

Clearer presentation of lender charges: The existing GFE provides an open-ended listing of all settlement charges, without distinguishing charges of the lender and those of third parties. The format encourages lenders to invent new charges, and -- since all the figures are "estimates" subject to change -- to escalate charges as loans move to closing.

The format encourages borrowers to question individual lender charges -- what they mean and whether they are fairly priced -- while neglecting the only number that matters, which is the total of all such charges. The current GFE does not even show total lender charges!

The new GFE makes a clear distinction between lender charges and third-party charges, and lender charges are no longer itemized. Lender charges consist of just two items: points that are paid to reduce the interest rate, and the total of all other charges, referred to as the origination charge. The origination charge cannot change at closing. The sum of the points and origination charge is the adjusted origination charges.

Clearer presentation of broker charges: On brokered loans, the origination charge includes any fee paid to the broker by the lender, called the "yield spread premium," or YSP. The YSP is also shown as an upfront credit to the borrower (negative points) granted in exchange for a higher rate. This allows the borrower to see how much of the origination charge is being paid indirectly through a higher rate.

Brokers don't like this method of disclosure, but in my opinion it clarifies an inherently confusing process. Not all borrowers are going to "get it," but even if they don't understand how the figures are derived, the bottom line figure for adjusted origination charges, together with the rate, provides an unbiased price comparison between direct and brokered loans. ...CONTINUED

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