Lenders, HUD clash over Good Faith Estimates

A single sheet of paper has the real estate industry in an uproar.

Every time a potential homebuyer applies for a mortgage, he or she receives a document known as the Good Faith Estimate, which spells out the fees the buyer is expected to pay when the deal closes.

The problem is the document is confusing and there is plenty of room for abuse, if not outright fraud.

“The unnecessary complexity of mortgages has actually greatly contributed to our housing crisis,” says Brian Montgomery, assistant secretary for the Department of Housing and Urban Development. “We must do something to make mortgages more understandable and the process much more transparent.”

HUD has proposed an overhaul of the process of applying for a mortgage. And the agency predicts that simplifying the Good Faith Estimate to help borrowers better understand the loan could save homebuyers $670 on every mortgage loan on average.

But any changes to the stack of paperwork that consumers must sign before buying a house will have a big impact on real estate agents, mortgage brokers, banks and title companies, and they all want a say in how the documents look.

Critics say the changes would be complicated and costly, and don't necessarily make the process easier for consumers to understand.

HUD's new four-page Good Faith Estimate includes a summary of terms, interest rate and monthly payment. More importantly, it explains whether the interest rate and principal balance can increase and if there is a penalty if the borrower pays off the loan early.

In theory, if borrowers had a better understanding of loan terms, they might have avoided some of the riskier loan products that became popular in recent years.

Mortgage brokers and bankers are battling over what kind of fees should be disclosed. Brokers say the HUD proposal treats them unfairly because a type of incentive payment given to mortgage brokers would be disclosed, while a similar fee for bankers would not be disclosed.