New Good Faith Estimate

In an effort to help consumers better understand the terms of their mortgages before they close, HUD has come up with a new standardized Good Faith Estimate for everyone to use by January of 2010. The goal is to make sure that all the terms of the loan are clearly disclosed.

Here is a link so you can see the proposed form for yourself.

This new form includes everything from the old GFE plus a lot of other information already disclosed on other required forms. There are check boxes to indicate if your loan is adjustable or has features like a balloon payment or a prepayment penalty. It also groups different categories of fees in ways that make more sense and further clarifies the total amount of broker compensation.

One new bit of information is the Tradeoff Table. This table compares the loan you are actually getting to two other available options. First is the same loan with lower fees (and therefore a higher rate), and the other is the same loan with a lower rate (and therefore higher fees). It's an interesting comparison and will help to demystify the famous "no-fee" loans by clearly showing how you pay those fees through a higher rate.

While I'm certain the regulators mean well, they clearly haven't spent enough time in the real world with actual borrowers to be able to do it well. If the problem is that consumers are taking loans that they don't fully understand, adding more paperwork is not the solution.

Anyone who has been through a package of loan documents can tell you that the reason people don't read and understand everything is that there is simply too much of it. Many concepts, like the need to maintain homeowners insurance, are covered by at least three separate forms. There are disclosures on everything imaginable, including my favorite form which advises borrowers that failing to make payments on time may result in negative information being reported to credit bureaus. Wow! Who knew!

The only way to make sure that borrowers are getting loans that they understand and that are the best loans for their particular circumstances is for them to work with a trustworthy loan officer. Since that's impossible to legislate, we have to make due with better disclosure. However, more paperwork does not necessarily result in better disclosure.

A better solution might be to get rid of 90% of the current pile of required forms in favor of 5 or 10 new ones that are clear, easy to understand, and cover all the important issues. That way critical information wouldn't be buried under an endless stack of disclosures. I'm interested to hear your thoughts on this.