Lenders | REAL ESTATE TIPS FOR THE REAL WORLD

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 FICO SCORING SYSTEM ANNOUNCED AND FHA LOAN MARKET UPDATE

March 18, 2014

Breaking News. FICO has announced that it will release the next broadly available version of the FICO Scoring System beginning this summer.

INTRODUCING FICO ‘SCORE NINE”: Using a new, multi-faceted modeling approach, which combines sophisticated in-house analytic technology with insights gained over 50 years of building credit risk models, FICO ‘Score Nine’ will provide the best-in-class predictive power across all of the major credit product lines—home loans, auto loans, credit cards and personal loans—from loan originations, all of the way through managing and servicing the loan. FICO has also addressed lenders’ concerns regarding score consistency across the three major credit bureaus, and compatibility with previous FICO Score versions to ease adoption. The FICO Score continues to help keep lenders aligned with key compliance objectives and relevant government regulations. The FICO Score is the most widely used credit score in North America. Lenders purchased more than 10 billion FICO Scores in 2013, and 90 percent of all U.S. consumer lending decisions use the FICO Score.

WHO WILL UTILIZE THE NEW FICO SYSTEM?: The 25 largest credit card issuers, the 25 largest auto lenders and tens of thousands of other businesses rely on the FICO Score for consumer credit risk analysis and federal regulatory compliance. “To become a widely adopted industry standard, a credit score must work well across industries, across all lending product lines and across the entire credit lifecycle,” said James Wehmann, executive vice president of Scores at FICO. “The major changes in the lending environment over the last few years demanded that we take a different approach to building a score that will continue to perform consistently well in various situations. We devised an innovative approach to developing FICO Score Nine that enabled us to leapfrog our own industry-standard benchmark. Our goal is to continue to support a financial ecosystem that includes lenders, securitization investors, rating agencies, regulators and other stakeholders who need a common risk benchmark.” Source: NAMP Daily – www.nampdaily.com

HOMEPATH AND HOME STEPS OFFER FREE CLOSING COSTS AND OTHER INCENTIVES: Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac recently introduced new incentives to bolster home sales through their HomePath and HomeSteps programs, respectively, which are designed to help the firms liquidate the real-estate owned (REO) properties they hold in their portfolios.

Specifically, Fannie Mae is offering up to 3.5% in closing cost assistance on HomePath properties available in 27 states during the FirstLook period. During the FirstLook period, owner-occupant or public entity buyers are able to submit offers on HomePath properties, giving them the opportunity to purchase homes without competition from investors.

Fannie Mae recently announced the extension of the FirstLook period from 15 days to 20 days. To be eligible for the incentive, the initial offer must be submitted between now and March 31, 2014, so there’s not a lot of time left to utilize this program (unless it’s extended). Homes using this incentive must also close on or before May 31, 2014.

The incentive will offer qualified buyers up to 3.5% of the final sales price to pay closing costs. In addition, home buyers have a choice of $500 incentives they can use towards condominium association dues, flood insurance premiums or the home warranty of their choice. To qualify for these additional incentives, the closing must settle on or before May 30, 2014. The promotion does not apply to investor purchases, auction sales, sealed-bid sales and bulk sales, Freddie Mac reports. Source: MortgageOrb, www.mortgageorb.com For a list of available properties, call your local Realtor or go to: http://www.homepath.com.

AN FHA UPDATE AND PREDICTIONS FOR THE UPCOMING YEAR: Following the first-ever Treasury draw required by the Federal Housing Administration this year, the agency says it is back on stable footing and does not anticipate requiring Treasury assistance in fiscal year 2015. As reflected in the Obama Administration’s proposed budget for the coming fiscal year, both FHA’s forward and reverse lending programs are expected to be cash flow positive with the Home Equity Conversion Mortgage program anticipated to have a negative subsidy rate at -0.23%. A positive credit subsidy indicates the program would require cash to cover losses.

In this case, however, the HECM program is expected to perform on its own, slightly above its break-even point. The earlier bailout to the tune of $1.7 billion was largely attributed to losses in FHA’s reverse portfolio. “The budget estimates the Mutual Mortgage Insurance Fund will have a positive capital reserve balance of $7.8 billion,” said FHA Commissioner Carol Galante of the entire fund outlook following the budget release. “We will not require a mandatory appropriation from the Treasury this year.”

FHA touted its performance and positive outlook in the coming year, pointing to achievements such as reducing chronic homelessness by 16% and assisting 450,000 homeowners facing foreclosure through loss mitigation assistance in the midst of last year’s budget sequester. “This is more remarkable given the context in 2013,” Housing Secretary Shaun Donovan said. “Given the sequestration that cut across the entire federal government budget, HUD was faced with finding ways to cut 5% from our budget with very little time to prepare and just seven months left in the fiscal year. We made some extremely difficult choices. We’re proud of what we did to provide best possible outcomes.” Source: Reverse Mortgage Daily – www.reversemortgagedaily.com

Congress’s lack of progress on reforming the U.S. housing-finance system shouldn’t be “an excuse” to delay rebuilding the market for private-label mortgage securities, a senior U.S. Treasury Department official said recently. “Many investors have told us that they can and want to take mortgage credit risk,” said Michael Stegman, housing-finance counselor to the Treasury secretary, in prepared remarks at a research conference in New York. Adding simplicity and transparency is a key first step, he said. “To get back to an efficient, responsible, and sustainable level of complexity, and to rebuild trust, the new issue non-agency market must first follow a path of greater standardization and transparency,” Stegman said. Federally controlled buyers Fannie Mae and Freddie Mac have been in a conservatorship since 2008, an arrangement that has lingered with U.S. lawmakers disagreed over the appropriate role for government in housing finance. Source: Market Watch – www.marketwatch.com.

EASIER QUALIFYING EXPECTED FOR FHA MORTGAGE BORROWERS: First-time and low-income borrowers may have an easier time qualifying for a Federal Housing Administration loan. Ginnie Mae, a government agency that issues bonds backed by FHA loans, reports that the average credit score on FHA-backed loans fell to 680 in 2013, and the average debt-to-income ratio rose to 40.3 percent — both indicators that credit may be easing. In comparison, Ginnie Mae reported in January 2013 that the average score was 701 and the debt-to-income ratio was 38 percent. “The FHA theoretically allows scores as low as 580,” the L.A. Times reports. “But lenders, buffeted by defaulted loans and demands that they buy back troubled loans that they sold, generally have set standards higher since the financial meltdown.” Source: The Los Angeles Times – http://www.latimes.com

A Note from Kristen: Actually FHA allows scores down to 500, but requires a down payment of 10% below 580. But many lenders do not want to underwrite loans under 640 (580 is the absolute minimum I have seen here in Charlotte, NC, and those loans also come with higher loan origination fees and interest rates). While many lenders have lowered minimum scores, FHA’s quality assurance initiatives ensure that lenders will still be underwriting their files under a microscope and looking at the loans carefully, because lenders now have to buy back their “bad” or defaulted loans if any errors are found in the original underwriting process.