A call for clarity at the closing table
Do consumers really know what they're signing?
By Tom Kelly, Wednesday, March 2, 2011.
A big piece of the current mortgage mess can be traced to the fact that borrowers were hit with loan presentations that seemed too good to be true. Mortgage money was easy to obtain, and some lenders raced to sign up as many customers as they could and pocket the loan fees. They didn't really care if the borrower could actually afford the loan they were signing.
The prevailing philosophy was that if a borrower -- regardless of age, income or nationality -- got behind on mortgage payments, home appreciation would bail them out and provide the cushion to refinance the loan. That is no longer the case.
One of the biggest groups hit by the attractive yet misleading loan programs were "last-time buyers." These older consumers were not familiar with the terms or the plethora of loan programs available. These folks had no need, nor interest, in researching new loan terms and conditions because they had no intention of moving.
But suddenly something happened -- perhaps an accident or injury that required that they leave their family home and purchase a residence that better suited their new needs.
Another vulnerable group was first-time buyers, including many immigrants who were not able to understand the language let alone the real estate and mortgage jargon.
The bottom line is that many borrowers -- in all groups -- do not clearly understand loan documents and are afraid not to sign. Some have concerns about losing their loan lock; others don't want to appear ignorant in front of a spouse or escrow professional; while still others simply want the process to be over and done.
There has never been a notation stating "if you don't understand this, don't sign" at the closing table, nor have there been contact names and numbers provided if a borrower has questions. The escrow officer -- an independent third party -- can do only so much before referring specific questions to the lender or Realtor.
What if there was more support for not signing on closing day? What if there was no penalty -- real, perceived or threatened -- for waiting to sign the loan until the borrower truly understood loan adjustments, prepayment penalties and potential assumptions?
Three mortgage analysts, including Ed Pinto, a consultant to the mortgage finance industry and former chief credit officer at Fannie Mae, have crafted a one-page mortgage information disclosure form that encourages borrowers to do more than simply look before they leap.
An appendix supplies explanations to all loan terms and conditions. For example: "You do/do not have a loan with possible "negative amortization." If you do, make sure you really understand what this means. Start with the definition on p. 3."
In a clear, concise way, the one-page form asks borrowers if they understand the documents and requires them to approve their monthly income and other basic, yet critical, financial data at closing. At the bottom of the form it states "do not sign" until all the material is understood.
In a report on abusive lending, the federal government recommended that increased consumer education and disclosures about the lending process would cut down on abusive lending.
Among other measures, the report also called for bans on harmful loan sales practices that do not consider the consumer's ability to repay a loan; a ban on lump-sum credit life insurance; and limits on points, prepayment penalties, and fees that can be financed with a home loan.
All of that is well and good, but the average borrower does not really care about another loan caveat coming from Uncle Sam. Borrowers are overwhelmed with the loan process, and the additional disclosures simply compound the anxiety and lengthen the time at the closing table. How about consolidating to one meaningful form?
For example, the closing officer for a refinance or new purchase loan will often say that "this is just another form that the government (or lender) makes you sign." The borrower reluctantly signs it, hoping to get out of the room sooner by doing so.
Loan reps and escrow officers might say that a new one-page disclosure information form is not needed because much of the information already is included in the escrow packet. Nothing in the packet, however, states "do not sign this form if you do not understand it." Hopefully, if that one form were a substitute for a stack of other forms, borrowers would pay more attention.
Tom Kelly's book "Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World's Bargain Zone" was written with Mitch Creekmore, senior vice president of Stewart International, and Jeff Hornberger, the National Association of Realtors' international market development manager. The book is available in retail stores, on Amazon.com and on tomkelly.com.
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Submitted by SoCal Realtor on March 2, 2011 - 10:31am.
Tom:
Isn't it implied that when you SIGN a contract you are stating that you have taken the time to understand what you are signing and that you have taken the time to ask questions? Why would anyone sign a 30 year commitment if they didn't understand it? How much regulation has to be put in place to protect people from themselves?
The bottom line is that people should not sign documents that they do not understand. If they do sign and suffer adverse affects from their poor decisions they should suffer the consequences. Maybe they won't do it again in the future.
Submitted by Jean-Claude Martin on March 2, 2011 - 11:08am.
Very interesting point of view. If we look at this scenario from the view of unexperienced home buyer or last time buyer, they really have no hope unless they have the right representation in the transaction. The right representation would walk this client through every process and insure that all documents are understood before being signed. The reality is it comes down to the RE Broker, RE Agent, Loan Officer and all involved to implement their fiduciary duties toward the clients they have that apply for varying types of mortgage products.
Submitted by Beth Tyler on March 2, 2011 - 2:28pm.
The time to verify understanding; in deed the time to walk away is WAY BEFORE the day of closing. The time is BEFORE you sign a legally binding contract. The buyer has a contractural obligation to a seller that is above and beyond the loan specs. Buyers can't be allowed to delay or walk away from settlement because they don't know what is going on or what their obligation is within a loan. ... unless, the lender is then on the hook to purchase the property in lieu of their confused client? Then - I gaurantee every buyer will understand their loan and what it will take to pay it off.
Otherwise, can you imagine the abuse? No one would ever sell a house if buyers may delay closing on a whem. Or there would be need for a significant non-refundable deposit to "hold" a property until closing.
Beth Tyler
Long & Foster Real Estate, Inc.
102 Old Solomons Island Rd
Annapolis, Maryland 21401
Office (410) 266-5505 ext# 1043
Toll-Free (800) 345-6787 ext# 1043
Submitted by Beth Tyler on March 2, 2011 - 2:28pm.
The time to verify understanding; in deed the time to walk away is WAY BEFORE the day of closing. The time is BEFORE you sign a legally binding contract. The buyer has a contractural obligation to a seller that is above and beyond the loan specs. Buyers can't be allowed to delay or walk away from settlement because they don't know what is going on or what their obligation is within a loan. ... unless, the lender is then on the hook to purchase the property in lieu of their confused client? Then - I gaurantee every buyer will understand their loan and what it will take to pay it off.
Otherwise, can you imagine the abuse? No one would ever sell a house if buyers may delay closing on a whem. Or there would be need for a significant non-refundable deposit to "hold" a property until closing.
Beth Tyler
Long & Foster Real Estate, Inc.
102 Old Solomons Island Rd
Annapolis, Maryland 21401
Office (410) 266-5505 ext# 1043
Toll-Free (800) 345-6787 ext# 1043
Submitted by Mickey Jones on March 2, 2011 - 5:17pm.
I agree with SoCal Realtor. I'm an ex escrow officer who had to provide all those documents to borrowers. There were always new forms coming from the lenders to draw attention to some specific point or a new government required document. IT IS overwhelming to buyers and borrowers. I get what you are saying but I don't think adding one more page to the package even if it says DON'T sign if you don't understand will really get the borrower where they need to be. I wish more loan officers were present or conducted the doc signing. THAT would make a difference!
Submitted by Barbara Bryan on March 6, 2011 - 7:38am.
Perhaps, instead of waiting to get to the closing table, the documentation for the loan might be gone over with the borrower so that they could ask questions before closing?. In a scenario like this, who would this borrower's advocate be?
Submitted by Kathleen Scanlon on March 10, 2011 - 6:38pm.
In New York, home buyers have their lawyer at their side to explain the documents and review the terms of the transaction.
I remember sitting at the table with a young couple purchasing new construction. Their mortgage broker had set up a first and second mortgage for them to finance the transaction. The first mortgage was an negative amortization option arm.
I reviewed the terms and quickly came to the conclusion that they would hit the 110% ceiling in the middle of year 2. The loan would then re-amortize at the much higher rate - effectively doubling their monthly payment. Problem was, they couldn't even refinance because the loan came with a 3 year pre-payment penalty.
I was able to explain to them what the terms were, what was going to happen and what the payment would be. They were able to make the decision that this loan was not for them. I spoke to the attorney for the seller who agreed that this loan was unconscionable and had his client refund their downpayment. I didn't charge this young couple a penny.
This is the difference of going to closing with a real estate attorney at your side.