New Changes On The Horizon For Closing Procedures and HUD 1 Closing Statements

May 4, 2015

Changes in the Closing Process – What you Need to Know

By Michele McCaskill, Vice President of Risk Management, Charlotte Regional Realtor Association

Ken Trepeta, director of real estate services for the National Association of Realtors®, was in Charlotte April 24 to discuss the RESPA/TILA changes that go into effect October 3, 2015. These changes effectively alter the way the closing process, as you know it, will work.

Trepeta’s presentation hit the highlights of what real estate professionals need to know about these changes and offered some tips that could make the entire process easier to manage. For those of you who missed the presentation, here is a brief recap.

The goals of the changes were to make the mortgage disclosure forms easier to use, to improve consumer understanding of the process, to aid comparison shopping and to prevent surprises at the closing table. However, these new changes are leaving everyone – from real estate professionals, lenders and real estate attorneys – confused and concerned.

To begin with, these changes have resulted in two very different-looking forms that replace the HUD-1 Settlement Statement, the Truth in Lending disclosures (TIL) and Good Faith Estimates (GFE) you have all become so familiar with. Instead you will soon be using the Loan Estimate (LE) and Closing Disclosure (CD) forms. The new LE and CD apply to most closed-ended consumer mortgage loans but do not apply to such things as home equity lines of credit, reverse mortgages, mortgages secured by mobile homes or by dwellings not attached to the property, or a creditor that makes five or fewer mortgage loans in one year.

On August 1, the GFE and TIL disclosure will be replaced by the Loan Estimate (LE). The LE provides a summary of key loan terms and estimates of loan and closing costs. Oddly enough, Trepeta says, the LE is not really an “estimate” in many respects, as lenders will now be held to the exact number on more of the charges listed on the LE than they have been in the past and will have to come within 10% on many of the others.

In addition, lenders must provide the LE to consumers within three business days after submission of a loan application. Once six key pieces of information have been submitted to the lender (name, income, social security number, property address, estimate of property value and the amount of the loan sought), an “application” has been submitted and the LE must be sent out. Lenders may not charge a fee until the LE is received by the consumer and the consumer has shown intent to proceed with the transaction.

And then there is the Closing Disclosure (CD). The CD must be received by consumers at least three business days prior to settlement. This means that if the CD is mailed, it should be mailed at least seven days before settlement. The CD replaces the final TIL disclosure and the HUD-1 Settlement Statement and provides a detailed accounting of the transaction. If certain major things have been changed on the CD, there is an automatic additional three-day wait time before the closing may occur.

Trepeta stated that now, more than ever, real estate professionals and other settlement service providers will have to be on top of their clients and customers. Realtors® should strive to keep communication between all parties flowing throughout the transaction to ensure everyone is on the same page with regard to the settlement process. He suggests that you have your clients ready for closing at least seven (7) days prior to the settlement date. This will help prevent unnecessary surprises at the closing table.

Most importantly, Trepeta advised Realtors® to caution their clients against making any last-minute changes. While not every change to the CD will trigger the additional three-day waiting period, any change could cause a delay. Since the lender is ultimately responsible for everything listed on the CD, any change requires going back to that lender for approval. If your lender is not at the closing table, this means tracking the lender down and waiting on that approval – a process that could delay your closing by anywhere from a few hours to a day or longer.

According to Trepeta, if you wish to avoid delays buyers should not expect to make changes at the closing table and sellers should not do anything that would require changes at the closing table. Listing agents, for example, should make sure their sellers abide by their original agreements, not taking items out of the home that the seller agreed to leave.

Trepeta made it clear that only three major changes to the loan terms would trigger the automatic three-day wait period: (1) a change in the annual percentage rate (APR) by 1/8^th of a percent up or down; (2) a change in the loan product or the loan terms; or (3) the addition of a pre-payment penalty.

As one example of how a last-minute change could affect the APR, Trepeta explained that if a seller decides to remove the dining room chandelier after agreeing it was to convey and then makes a $1,000 seller concession at closing to cover its removal, that concession could affect the APR, thus triggering the three-day wait period. Bottom line, if you can avoid making changes at the closing table, you should.

Trepeta stated that as of right now, there are still a lot of unanswered questions. For example, the new rules do not sufficiently address those unexpected and unavoidable changes. To help everyone navigate through this new territory, Trepeta suggests adding 15 days to the expected closing time and to other deadlines. For example, if you normally close in 30 days, expect that it may take 45 days to close. Of course it may not, but at least you are prepared by having built in the extra time you might need.

Another rule of thumb, said Trepeta, is that if you want to close on the 30^th, make sure you have everything ready by the 23^rd. He also suggested doing more than one walk-through. Realtors® may want to perform a “pre-walk-through” seven days prior to closing to allow enough time for changes to be made and approved prior to the actual settlement date. Then follow up with your final walk-through as normal.

There are many more rules surrounding this reform that Trepeta was not able to discuss in detail during his presentation, including tolerance limitations and minor revisions and corrections. However, there are many resources available for Realtors® as the August 1 deadline approaches.

You can watch Trepeta’s entire presentation in Charlotte here. For additional information on this topic, visit www.realtor.org/respa or sign up for the North Carolina Association of Realtors® webinar on May 13.

You may want to start familiarizing yourself with these new forms now so that when October 3rd rolls around, you will be ready. View samples of these documents here.

For more information on these upcoming changes, please contact Kristen Haynes, Broker In Charge, Realtor, GC, CMRS at New Home Buyers Brokers / Realty Pros: 704-905-4062 or khaynes@newhomesnc-sc.com. Web: www.NewHomesNC-SC.com

      

New, Tougher Appraisal Guidelines Are Coming Soon, Courtesy Of Fannie Mae And Freddie Mac!

February 28, 2014

Taken from an excerpt written by Hank Miller, SRA

   

While you slept, the appraisal industry had yet another “check” placed upon it: Collateral Underwriting. Weeks into it appraisers are adjusting, but the warnings are clear; appraisers must have justification for everything in the report. Opinions? Fuggettaboutit – did you agents and sellers hear that?

Regulations state that appraisal adjustments cannot be based upon an appraiser’s opinion. According to federal and state law, adjustments must be based on support and evidence – proof if you will, and an appraiser’s opinion is not considered to be “support.” Many appraisers have failed to support their adjustments and as a result have had their licenses revoked, penalties assessed and lawsuits lost, all because the they failed to understand a single but important requirement. – Richard Hagar, SRA

So what’s the impact on home buyers and sellers AND agents? It’s pretty simple and the basic tenant hasn’t changed – provide tangible data to support value and adjustment positions. What has changed, is the noose that’s even tighter on appraisers. Fannie Mae defines Collateral Underwriting as:

Collateral Underwriter (CU) is a proprietary model-driven tool developed by Fannie Mae that provides an automated appraisal risk assessment to support proactive management of appraisal quality. Fannie Mae will make CU available in 2015 to provide transparency and help lenders more effectively and efficiently identify issues with appraisals.

In case you missed it, reread the first sentence and note the word “automated”. The marble mouthed government speak is best said as “appraisals will be reviewed by software to validate adjustments and comparable selection”.  Boil it down even further, most understand a “zesstimate” and most are also annoyed when they complete one on their home. A zestimate is an AVM – defined as:

Automated valuation model (AVM) is the name given to a service that can provide real estate property valuations using mathematical modelling combined with a database. Most AVMs calculate a property’s value at a specific point in time by analyzing values of comparable properties.

Right. In simple terms, it’s a computer program that “analyzes” data to arrive at an estimated market value. There are obvious fundamental flaws using computers for this – real estate is perhaps the most unique entity in the world, no two parcels or homes are alike and conditions behind a sale are never the same.

So if you as a seller or your agent feel that changing the cabinet pulls adds $7500 or replacing the gold “brass look” ’88 bathroom strip light adds $2000, bring something to support that. That condo on the 10th floor is worth $75000 more than the same exact units on the 5th and 6th floor? Support it.

The idea that “checks” are going to be made by computer programs is completely asinine – the unique nature of real estate precludes this type of blanket research. However, the appraisal organizations allowed this to occur and this has been in motion for years. Collateral Underwriting involves more than this but the end result is clear: an appraiser’s opinion, agent’s opinion or seller’s opinion is not considered to be “support”.

 

Kristen Haynes, Broker In Charge, Realtor, NC / SC, GC, CMRS

Says Kristen from New Home Buyers Brokers / Realty Pros, www.NewHomesNC-SC.com: “I would argue appraisals in truth serve no purpose in residential real estate transactions. Market value is and should be defined as what a ready, willing and able buyer will pay for the property. Appraisals have always served only one, true purpose: to supply the bank a scapegoat if they end up foreclosing and then can’t get the property sold for what’s left outstanding on the mortgage. Yet, “Automated Appraisal “reviews are allowed, and even encouraged? Don’t make me laugh- they are as pointless as automated estimates of value (think Zillow’s Zestimates)-utterly worthless. Just sayin’. we have been fighting low ball appraisals for years after the banking fall out, due to Appraisers not wanting to get in trouble with the feds due to what was the new federal HVCC rules (we call in HAVOC in the business). We have a socialistic system that doen’t allow lenders to choose the best, local or most experienced appraisers- we have appraisers sfrom Salisbury chosen to come down into Indian Land, or appraisers who don’t know how to value new construction doing appraisals that they can’t “find comps” for (call the builder, most “to-be-builts” never hit the MLS, as they are built for a particular homeowner, unless they are a “spec” or cancelled contract. So now, more regulations, when we are just starting to see Appraisals get more realistic?” What’s your opinion?

          

Weekly Mortgage Snapshot and Economic Forecast

 

Mortgage rates mostly leveled off last week, with limited data for markets to digest. The biggest news

of the week came from Europe, where the European Central Bank announced a quantitative easing

program to purchase sovereign debt of member countries. There is debate as to whether this program will make much of an impact; with some arguing that it will keep pushing money to the US.

Markets will have plenty to chew on this week, with some major economic reports and a meeting of

the Federal Reserve. Many analysts are hoping that the Fed will bring some additional clarity as to

whether it intends to begin increasing rates this summer. It is not likely that we will receive much

more guidance from this meeting. However, if the Fed does seem likely to begin increasing rates this

summer, then rates may start slowly moving upward now. On Friday, the first estimate of 4th quarter

GDP is due. Expectations are for a drop from the 5.0% of the 3rd quarter. If we are surprised again,

and GDP was much stronger than expected, rates are likely to begin pressing upward.

Worth Remembering Gen Y in the Burbs or the City?

Nothing’s better than the

wind to your back, the

sun in front of you, and

your friends beside you.

Aaron Douglas Trimble

A new survey from the National Association of Home Builders has thrown more doubt on what many economists and city planners have assumed, that is, that those born in the 1980’s and 1990’s prefer to live in the city. The recent survey found that 66% of survey Gen Y’ers want to live in the suburbs, 24% want to live in rural areas and 10% want to live in a city center. The most predominate reason was a desire to have a larger home with three or more bedrooms.

Mortgage Rate Watcher

Volatility High 2.00%

4.50% – Average expected 30 year rate for A = credit for first quarter of 2015

Based on: 12 Mn Libor 0.623% 6 Mo Libor 0.357% 11th D. COFI 0.686% Prime 3.250% Fed Fund 0.250%

E C O N O M I C S N A P S H O T

Dow Jones 17,672.60 NASDAQ 4,757.88

23-Dec %pt Chg 30-Dec pt Chg 21-Jan % Chg NYSE 10,788.33 S&P 500 2,051.82

Manufacturing: Expanding

Unemployment: Stable

Gross Domestic Product: Economy Expanding

Sales Slowly Growing In The First Quarter, Mortgage Rates To Remain Relatively Stable

Lender’s Credit Score Requirements May Be More Strict Than Necessary

Lenders’ Credit Score Requirements May Be More Strict Than Necessary

FICO scores run from 300 to 850. Wells Fargo recently lowered in minimum acceptable scores for conventional loans to 620 from 660. Could this signal the start of some fresh thinking on credit scores? As Realtors, we certainly hope this is the case. As much as stricter credit scoring models were needed after the banking crash in late 2007, credit has been unreasonably tightened to the point that “good borrowers” were still unable to get loans. This includes First Time Home Buyers, the Self-Employed, and Move-Up Buyers who had to switch jobs or careers due to downsizing during the recession.

Are lenders’ credit score requirements for home buyers this spring too high — out of sync with the actual risks of default presented by today’s borrowers? The experts say yes. We agree.

What experts are we talking about here? The actual developers of the credit scores used by virtually all mortgage lenders. Executives at both FICO, creator of the dominant credit score used in the mortgage industry, and up-and-coming competitor VantageScore Solutions, confirmed that mortgage lenders could reduce today’s historically high score requirements without raising their risks of loss. In the process, many prospective buyers who currently can’t qualify might get a shot at a loan approval. This will be a good thing for buyers and sellers alike, and will help keep the housing market going in the right direction.

Consider this: Consumer behavior in handling credit is subject to change over time, often keyed to regional or national economic conditions. Credit scores that were acceptable risks in the early 2000s — say FICOs in the 640-to-680 range — turned into larger-than-anticipated losers when the recession hit. Now that the housing rebound is well underway and federal regulators have imposed tighter standards on income verification and debt ratios, the high credit score “cutoffs” that virtually all mortgage lenders imposed in the scary aftermath of the crash are stricter than necessary.

FICO scores run from 300 to 850. Lower-risk borrowers have high scores, and higher-risk consumers have low scores. Early in the last decade, a FICO score of 700 was good enough for an applicant to get a lender’s best deals or close to it. Today a 700 FICO just barely makes the grade — 50-plus points below the average score for home purchase loans at Fannie Mae and Freddie Mac, the big investors. Banks now need to package and sell their loans on the secondary market, and if a homeowner defaults on the loan and the Underwriter review team finds something potentially amiss, the bank or lender now has to “buy back” the bad loan. Not something lenders want to do in the aftermath of such past, big bank failures due mainly to bad loans.

  

Joanne Gaskins, senior director of scores and analytics for FICO, said that statistical studies by her company have demonstrated that “the risk of default on more recent mortgage vintages is better than at the onset of recession” — essentially real risk has reverted to the early 2000s. A lot more people pay on time. As a result, she said, lenders can afford to “take a look” at their current strict scoring requirements and consider lowering them without sacrificing safety.

To illustrate how consumer behavior has improved, Gaskins cited one internal study that examined mortgage default data through 2011. At a FICO score level of 700 in 2005, roughly 36 borrowers paid their loans on time for every one who went into serious default. In 2011, by contrast, for every one defaulting mortgage borrower, roughly 91 paid on time. That’s a huge decrease in risk to the lender.

VantageScore Solutions has documented a similarly dramatic improvement in mortgage borrower payment behavior. In an article scheduled for publication this week in Mortgage Banking, a trade journal, Barrett Burns, president and chief executive of VantageScore, offers an analysis based on scores of 680 and 620 from 2003 through 2012. VantageScore’s latest scoring model uses a high risk to low risk scale of 300 to 850.

According to Burns, the probability of default at both score levels was lowest in 2003-05, then soared between 2006 and 2008 as the economy began deteriorating. By 2012, both scores were just slightly higher than 2005’s.

Burns notes that although auto lenders and credit card banks have adjusted their underwriting standards to these important changes in borrower risk, “the mortgage industry has been hesitant.” In an interview, Burns emphasized that mortgage lenders could expand home purchase possibilities for large numbers of consumers simply by lowering score cutoffs. They wouldn’t have to loosen up on their standards on down payments or debt ratios — just their scores.

A study last year by the Urban Institute and Moody’s Analytics estimated that every 10-point reduction in mandatory credit scores on mortgages increases the pool of potential borrowers 2.5%. A 50-point cut in score requirements, researchers found, would increase potential home purchases 12.5% — more than 12.5 million households.

At least one major bank has concluded that lowering scores is the way to go. Wells Fargo , www.wellsfargo.com, recently announced reductions in minimum acceptable scores for conventional loans to 620 from 660. They are joining other major banks in lowering the acceptable score threshold for FHA loans to 600. See the article here from Bloomberg News.

Could this signal the start of some fresh thinking on credit scores, a trend that other large lenders will pick up on? Let’s see. If they do so, it should be a win-win for everybody involved.

Copyright  2014 New Home Buyers Brokers, Inc. / Realty Pros. With excerpts from: Kenneth R. Harney, Washington Post Writers Group

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