Sunday, August 22, 2010

Mortgage Refinance: Thanks Uncle Sam!

My wife and I are in the throes of refinancing our mortgage. The impetus was trading down from a 5.875% rate to 4.375%. This week, we received our loan application package, that includes the Good Faith Estimate (GFE) of mortgage costs, on the lesser-known form HUD-GFE.

Background information: Mortgage rates are at all-time lows due to continued economic weakness, Federal Reserve policy keeping short-term Fed Funds rates near zero, the Fed's policy of buying government bonds in the open market and keeping long-term rates low, and government support for Government Sponsored Entities (GSE's, i.e. Fannie Mae, Freddie Mac) that continue to finance home mortgages. My wife and I would like to lower our monthly payments over the same term we have remaining on our current mortgage. Makes sense to me, then we received our application package.

The package contained 36 pages of difficult to understand disclosures. They required us to affix our signature 23 times. The GFE estimated our settlement charges at $7,941.75. Yes folks, to refinance our mortgage through the same financial institution that currently services (although does not own) our current mortgage, we have the opporunity to pay them $8k. To be fair, only $2,175 goes to the lender, which is paydown points for getting the low rate. Another charge is to fund an escrow account, which sounds ridiculous to us considering we have an escrow account with the same lender on the same property for our current mortgage.

Other charges include title services, including insurance. This is another part of the refinance process that makes no sense. We bought our home six years ago and paid for the title search and insurance at that time. Must it be done again to refinance? Where that requirement comes from, I don't know. But it is emblematic of the perplexity of the mortgage financing business.

This is an example of "We're from the government and we're here to help" good intentions combined with bad results. I think there could be mortgage finance rules drafted in a one or two page piece of legislation that makes it easier on all of us... borrowers, lenders, investors, and regulators.

Here is what I recommend to improve the process:

- For refinancing to the same homeowner on the same piece of property, an electronic title search is all that is required for homes where title insurance has been purchased within the last ten years;

- Permissions to verify income and account information can be done on a one-page letter;

- GFE's can be made much simpler and more condense. I predict my 11 year-old could come up with a more understandable form;

- Create an automated form that enumerates tradeoffs with financing closing costs or paying them. I went through a mathematical exercise because of my knowledge of the industry, re-investment rates, etc. to make my determination. Does or could everyone do the same so they make an informed decision?

- Create an automatic query and bid system once a mortgage application is made to settlement agents and title insurers. My guess is not many of us have "relationships" with these firms, so selecting nearby agents that participate in an electronic bid system would be extremely helpful. The same could be done for appraisers. I think if and figured this out for hotels, we could get something going for these service providers. These costs can go on the GFE directly from the bid system.

My guess is costs for the title, settlement, and appraisal engine would come down as a result of the competition. Right now, borrowers probably go with the company(s) recommended by the lender. This puts a premium on getting and staying on the lenders' recommended lists, which probably equates to many expensive dinners and tickets to great seats at sporting events.

At the end of the day, borrowing money and using your home as collateral should be easier, much easier, than it currently is. I think if we sat back and asked ourselves, "what makes sense here", the process would be a lot different... and probably less expensive for the borrower, less difficult for the lender, and easier to regulate.  What are your thoughts on the mortgage process?


  1. Your ideas make sense! Unfortunately, it seems like common sense is a rarity in this corner of the financial world!

  2. Well said Tom. Every form I encountered probably started with good intentions or desire by a lawmaker or regulator to "do something", regardless of consequence.