There’s always something to howl about.

Will Pre-Approval Letters Be Banished?

Score one more screw up for the Government-Banking Complex…and watch mortgage brokers thrive because of it.

Andrew Duncan of Keller Williams in Tampa, FL reprinted a Mortgage News Daily story:

As part of the changes to the Real Estate Settlement Procedures Act, borrowers can no longer shop for a home with a firm loan commitment in hand. While that might not be a big deal in today’s buyer’s market — it could give cash-rich buyers an advantage when sellers are back in the driver’s seat.

Under the new RESPA rule, a lender cannot perform income, asset and credit verifications until the prospective borrower has received a Good Faith Estimate, Patton Boggs LLP Partner Rich Andreano told MortgageDaily.com in a telephone interview. Andreano is a RESPA expert with nearly 25 years’ experience who advises mortgage bankers, mortgage brokers and other providers of mortgage-related services about regulatory compliance and transactional issues.

What this means is that mortgage lenders will be forbidden from performing normal income and asset verifications, or seek permission to perform those tasks, without issuing a binding Good-Faith-Estimate of loan fees.  Pragmatically, this means that most large, direct lenders will not want to commit to the fees until they know the exact loan amount and purchase price.

One more reason to do business with a mortgage broker. Mortgage brokers don’t fund loans, they arrange them.  What mortgage brokers do have in their arsenal is all the pre-approval tools needed to secure an automated underwriting approval.  The new good faith estimate favors brokers because it allows them to fully-disclose the fee they earn for arranging that loan, while putting a time limit on the rate.

Andreano explained that HUD’s position is that verifications cannot be performed until the borrower has been provided with a GFE. But if a loan commitment is issued and the property costs vary significantly — the lender cannot revise the GFE.

“What you can’t do before the consumer gets a GFE in their hands is you can’t ask them to give you any verifying documents, nor can you ask them to give you authority to verify,” he stated. “The lender would be stuck with the cost estimates in the GFE.”

Mortgage brokers would be taking on a huge risk by filling that void, right?  Not true.  Mortgage brokers can issue a good-faith-estimate with a definitive time deadline on it; they only “fees” they are “locking in” are “origination fees”.  Mortgage brokers would be advised to estimate third-party fees, such as appraisal, title, escrow, etc., very generously to remain within the letter of the law.  Early disclosure allows for mortgage brokers to perform the necessary due diligence required to issue a pre-approval letter.

The ultimate responsibility for TILA disclosure falls upon the wholesale lender, when the loan is locked or submitted.  Pragmatically, this allows a mortgage broker to use all the pre-approval tools a wholesale lender offers, to perform that due diligence, while the retail channel of the very same lender will avoid such duties for fear of limiting its profits.

Mortgage brokers earned disclosed fees, just like real estate brokers, while direct lenders earn undisclosed loan profits (yield spread premium).  When faced with regulations that might limit those profits, the lenders just pick up their balls and go home.

That’s great news for mortgage brokers.  Even the big lenders know that.