The mighty Consumer Financial Protection Bureau has delivered new works. We have until August 2015 to get used to the new mortgage Loan Estimate and Closing Disclosure, which will replace the current Good Faith Estimate, Truth In Lending, and HUD-1 forms.
These forms are an improvement over the 2010 GFE, but so would have been three blank pages, the Magna Carta, or the Gettysburg Address. The demise of the 2010 GFE will instantly reduce demand for landfills.
Many people are so frustrated with government efforts like this that they hate government. Not me. We need financial regulation. Smart regulation, which is possible.
After the credit bubble, which fed the housing bubble, a period of reinvention was inevitable. The Dodd-Frank legislation began the process, a great, emergency spasm. Four bad ideas stick out: the Volcker Rule (more another time), skin in the game (retention of 5 percent of mortgages securitized), “qualified mortgage” (QM) and “qualified residential mortgage” (QRM) gobbledygook intended to define good underwriting for mortgages (we know how to do that), and creation of the CFPB.
The very last thing that our government needed was a new agency, its duties overlapping the Fed, the Comptroller, the FDIC, HUD, the SEC, the FHFA, the FTC, and two or three others on the payroll but forgotten.
New agencies are compelled to do things. They are incapable of reviewing old procedures and saying, “Really pretty good. We could fiddle with it, but not make it much better.” They cannot ever acknowledge that the conditions they were created to prevent have died on their own.
Today you could not get a subprime MBS off the ground if you put an H-bomb underneath. Six years ago, no loan officers were licensed; today all are. We can track any loan misbehavior all the way to the original perp.
The idea is alluring: Make mortgages transparent, easily compared, terms in concrete from day one, and all consequences disclosed to borrowers.
Unfortunately, mortgages are complicated. Even if they’re transparent, they are not not easily compared, terms shifting in real-time markets. And consequences … why, some people go to law school to understand contracts, property, promissory notes, and security instruments. No two states have the same law and documents, and few counties have the same foreclosure procedures.
So, what information should all borrowers receive, and how? The new Loan Estimate is not bad, just three pages. APR lives on, a concept alarming to anyone not facile with “net present value” math (“This is not your interest rate.” Then why do I have to sign this?). A heads up that you can shop for title services (ick). However, the one-page GFE used for 50 years before the bubble worked just fine for anyone with sense to ask for help, if confused.
The new five-page Closing Disclosure preserves all the confusion of the old HUD-1 (no minus signs for credits, 14 subtotals). It wanders off into liability after foreclosure, and duplicates other items in today’s easily understood three-page Fannie Note. Too much information.
Of no use at all to those who most need help, and an intimidating waste of time to the most experienced borrowers. Preclosing borrowers will have a mandatory three-day, no-changes review period, in which an attempt to make a change will add three more days and may forfeit a rate lock or earnest money.
Disclosure zealotry often fails in format. In his book, “The Visual Display of Quantitative Information,” Edward Tufte gave us the term “chart junk” for enthusiastic efforts at density and compression. The worst problem with these forms: info-junk. Too much in too little space, no way to repair without adding several more pages.
Of course, the real way to repair: Go back to the pre-2010 GFE; drop TIL/APR altogether; stick with the HUD-1, which everyone already understands; and put in bold type on every application and closing document, GET PROFESSIONAL HELP. As every real estate commission requires Realtors to advise.
I understand the hopelessness of asking for common sense from the CFPB. The final rule interpreting the new disclosures is 1,888 pages. One thousand, eight hundred and eighty-eight … pages … long.
Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at email@example.com.