Under Federal law, every home mortgage borrower must be provided with a Good Faith Estimate of Settlement Costs (GFE) within 3 days of receipt of the borrower’s application. The GFE was administered for many years by HUD, which made substantial improvements to it in 2010. Shortly thereafter, responsibility shifted to the Consumer Financial Protection Bureau (CFPB) where it now resides.
The GFE describes the loan and its
major features, including the interest rate, upfront lender fees, and
fees of third parties such as title insurers and appraisers.
Because of its complete itemization of all costs to the borrower,
mortgage shoppers often ask me whether or not the GFE can be used to
shop for the best deal? They have been encouraged to think that it can
be so used by both HUD and CFPB.
In its current Q and A for consumers , for example, CFPB states
that the GFE “will help you compare offers.”
If this were true, the GFE would
be an invaluable tool for borrowers. Unfortunately, it has never been
true and it isn’t true today, even with the recent improvements.
There are two
features of the home mortgage market that thwart all efforts to use the
GFE as a shopping tool. The first is that lenders can’t price a loan
until they have all the information about the transaction that affects
the price. Part of this information they get from the borrower’s
application, and part they get from other sources, including credit
bureaus, employers, banks and appraisal companies.
Because lenders need extensive information to price loans accurately,
the GFE can’t be required until after the borrower submits the
application. This forces the borrower looking to shop GFEs to submit
multiple applications, which is a cumbersome and
time-consuming chore, and it imposes heavy costs on lenders who do all
they can to discourage it. While
determined
borrowers can still do it, they can’t do it successfully because of the
second major feature of the market: this is price volatility.
All mortgage lenders
reset their prices every morning, and sometimes during the day. The only
price to which a lender can be held is its current price which will
lapse at the end of the day. Further, the price is binding on the lender
only when it is locked, which the lender will do only when it is
satisfied with the information it has compiled on the borrower and the
transaction.
The GFE in use
before 2010 did not require lenders to date the price shown on the GFE,
so it was useless for shopping. The GFE in use today requires lenders to
stipulate how long the price on the GFE is good for, and every lender
answers this in the same way: they indicate that the price is good only
until the end of the day the GFE is issued. They can hardly do
otherwise, because they will be resetting all prices the following
morning. But this means that unless the GFE is delivered to the shopper
the day it is issued, as opposed to the 1-3 days the law allows, the
shopper won’t receive a live price.
It is theoretically
possible for a shopper to submit applications to, say, three lenders,
all of whom issue GFEs on the same day and deliver it to the shopper
that day. In such case, the shopper could select the best price from
among the three and lock it before the lock desk of the chosen lender
closes for the day. The odds against doing this successfully, however,
are daunting.
Even if the borrower
submits all three apps for delivery at the same time, lenders have three
days from the day they receive the application to deliver the GFE –4
days including the day they receive it. On the assumption that the
likelihood of delivery time is the same for all 4 periods, the odds
against all three GFEs coming back on the same day are 15 to 1.
Even if all 3 GFEs
come back on the same day, furthermore, the borrower is under the gun to
make a decision that day. At the close of business that day, the window
closes and to reopen it would require submission of three more
applications to three different lenders.
Mortgage borrowers
who want to shop for the best price available will do much better using
a multi-lender web site. Instead of having to send their information to
each lender in a separate application, they enter it only once into the
web-based system, which uses it to price their loan with all the lenders
participating in that system – perhaps 5 or more.
The shopper sees live price quotes from multiple lenders at the
same point in time.
Neither is the
shopper under the gun to make a decision that day. While all the lenders
participating in the web program will reset their prices the next day,
the shopper can repeat the process with very little effort. Indeed, the
site may retain shoppers’ input data and update their prices
automatically.
Of course, not all multi-lender web sites are created equal. The best can be found at
Finding a Mortgage on the Professor's Certified Lender Network.