NAR study: HUD underestimates costs
Posted in RESPA reform By Matt Carter, Thursday, June 5, 2008.The cost of preparing HUD's proposed Good Faith Estimate will add up to $413 to the cost of obtaining a loan -- considerably more than the $181 claimed by HUD -- according to a study prepared for the National Assocation of Realtors.
The study, "The Estimated Costs of HUD’s Proposed RESPA Regulations," is authored by economist Ann Schnare.
Shnare's thesis is that HUD underestimates the number of GFE's that will have to be prepared. For every loan that's actually originated, HUD thinks lenders will have to prepare 1.7 GFEs. Schnare says 2.7 to 3.4 is a more realistic estimate.
"Using a 1.7 ratio to estimate the number of GFEs that are associated with a given origination volume assumes that ... new regulations will not affect the total number of GFEs that are issued in any given year," Schnare says -- or that there will be just one GFE per mortgage application.
HUD has either "seriously under-estimated the number of GFEs that will be issued under its new regulations or the regulations will not produce the amount of shopping behavior that the department would like to achieve," Schnare claims.
If more GFEs are produced -- 34 million to 43 million, instead of 21.2 million -- the annual cost of processing and tracking applications will rise from HUD's estiamte of $44.50 for every loan originated to $79 to $89, Schnare estimates.
If lenders decide to lock in interest rates for 10 days -- as Schnare says they might to be consistent with HUD's goal of encouraging loan shopping -- the cost of obtaining an interest rate hedge would add $272 to the cost of a $200,000 loan (assuming more than three GFEs per origination).
Additional underwriting costs including the need to pull additional credit reports would add up to $52 to the cost of each loan originated, Schnare estimates.
"Even under reasonably conservative assumptions, the average cost of the GFE would be well over $300 per loan, while the cost of the closing script would probably be closer to $100 (compared to HUD's $54 estimate)" she concludes "As a result, a relatively large share of the savings that are envisioned by the Department could easily be absorbed by these higher costs."
HUD estimates its RESPA proposal would save the average consumer $660 in up-front loan origination and closing fees, and produce efficiency gains of about $86 per loan for borrowers and about $112 per loan for originators.Schnare's solution? She says most of the additional costs she envisions "are associated with the guarantee embedded in the revised GFE," as opposed to the form itself. In other words, HUD should give up on tolerances.
"The department should seriously question whether its desire to provide greater certainty in closing costs is worth these additional costs," she says.
HUD could achieve "most, if not all of its stated objectives by simplifying and standardizing the GFE without imposing additional costs, complexities and paperwork on a process that is already far too cumbersome."
If HUD moves forward with the proposed changes, large lenders and brokers will have a leg up because they are " in a better position to negotiate rates and to extract pricing concessions from third party settlement service providers. While this may be good for consumers in the short-term, the increased concentration that would inevitably result could eventually produce the opposite effect."
Thoughts?
Seems like Schnare's argument that you'll need to do more than 1.7 GFEs per loan originated has some merit, but are the increased cost estimates realistic? And if so, don't consumers still come out ahead?
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Submitted by Diane Cipa on June 5, 2008 - 6:07pm.
Well, I think they would like to ignore just how many GFEs are produced by loan originators in the normal course of business as consumers are pre-approved and shop using today's standards.
The only thing that will change under the new rules is that there will be uniformity in the forms and procedures. The amount of effort expended in the process is unlikely to increase significantly once we get past the training stage.
Submitted by Dave Wirsching on June 5, 2008 - 7:03pm.
I would assume that there are a similar number of GFE's produced today. The point is that the new GFE will cost more to produce each time, and the expenses are cumlative.
This consumer savings is a fantasy. If lenders are going to have greater costs, they will pass them on to the consumer. Does anyone expect them to accept less profit? They will squeeze their vendors to death, and then once the smaller lenders are gone, they'll raise prices. Its capitalism 101.
Submitted by Diane Cipa on June 6, 2008 - 5:34am.
I agree Dave that the entire basis of the fight on both sides of RESPA reform is seated in our respective views on how a market will react to the reform. I believe that the reform will create a competitive marketplace which will directly benefit consumers.
I have no doubt that such a competitive marketplace will unseat the positions of many providers.
Those that can effectively manage costs, marketing and pricing will win. Those who can't, won't.
NAR is only interested because they have a vested interest in protecting their members who have created affiliations and referral networks.
Competition that serves consumers is likely to do what? Right, reduce prices. Capitalism 101.
I don't buy for split second that the production of GFEs will increase costs. There will be a training and implementation stage, but it will be no different than the implementation of the self-imposed Uniform Closing Instructions which the MBA and ALTA wish to adopt.
Change happens in our business. It always has and it always will. I've been in this game since 1976 and the entirety of processes has been in an almost constant state of change.
Computers have made changes so much easier. There is less human training and you don't have to destroy pre-printed forms.
Unless we now are completely steeped in an industry of idiots, people will and can adapt.