Have buyers and sellers won or lost under new federal mortgage rules? With nearly six months of experience now in hand the answer seems to be that there have been both wins and losses – but not in the way many had predicted
Known generally as the Know Before You Owe standards, the new rules went into effect October 3rd. The by-products visible to consumers include a new Loan Estimate (LE) form and a fresh Closing Disclosure (CD) statement, forms which replaced paperwork that had been in place since the 1970s.
For borrowers the new forms have lots of white space and are easy to read. However, behind the scenes the forms are powered by 1,888 pages of new federal rules. The rules are tough to understand, costly to implement and have largely shifted the liability for mistakes from closing agents to lenders. The Mortgage Bankers Association says profits per loan instantly fell 60 percent once the new rules went into effect.
The catch is that buyers and sellers don’t know about back-office problems and don’t care. For consumers, the big goal – the only goal – is to get the lowest rate and close with the fewest hassles. From their perspective, the impact of the new rules looks like this:
In the past lenders gave out pre-approval and pre-qualification letters like gumdrops. This was important because such letters could be used to assure sellers that a purchaser had the financial capacity to afford their home.
Now, however, the rules have changed. According to the National Association of Realtors more than a third of all lenders said last year they expected to limit pre-approval letters because of the new regulations and the possible penalties that could be imposed for errors.
In practice worries about a shortage of pre-approval letters hasn’t come to much. Even if such predictions were true it would still be easy to get pre-approval letters because most lenders continue to gleefully churn them out.
A major concern has been the possibility that the new rules would delay closings. While longer closing periods might actually be welcomed by many buyers and sellers because delays could create more time to pack and move, stalled closings could also produce expensive problems if they mean lock-in deadlines cannot be met.
Borrowers in such situations could potentially face higher rates while sellers might have to re-schedule movers or delay closing on replacement properties. Worse, marginal borrowers might not be able to qualify with higher rates, meaning sales might be lost – bad news for buyers, sellers, brokers and everyone else involved with the transaction.
Concerns regarding delays turned out to be justified – at least in the short run. The typical time required to close a loan went from 46 days in September to 49 days in November according to Ellie Mae. By January the average origination time reached 50 days. Happily, February saw a sudden and significant reversal with closings averaging just 46 days, the same as September.
Is the worst over? The better news for a single month does not suggest a trend, but if the numbers continue to decline we could return to the averages seen a year ago when loans were commonly originated in as little as 38 days.
One result of delayed closings has been the increased use of longer lock-ins, lock-ins that often represent an additional cost to borrowers.
“Typically,” says the National Association of Realtors, “a buyer pays a premium for each 15-day increment added to the base lock (e.g. 45 or 60 day rate lock). Or, if the buyer does not have a long enough rate lock and the settlement takes longer, they may need to pay for a rate extension, which is more expensive than a rate lock. For those home buyers impacted by the TRID-related delays, they may face higher costs due to longer rate locks or extensions. It is unclear whether lenders are absorbing these costs or passing them onto consumers.”
Have Additional Sales Been Lost?
As of early February NAR members said there had been both delays and cancellations under the new rules. They reported that 10.4 percent of all sales were delayed while .6 percent were canceled outright.
What we don’t know is how these numbers compare with closing stats before the Know Before You Owe rules went into effect. Without comparable figures we can’t say that delays and cancellations increased or decreased as a result of the rule changes.
Moreover, we don’t know why there were closing problems. One possibility is that borrowers failed to produce required paperwork in a timely manner but another is that lenders are responsible for some of the delays and cancellations.
Under the Know Before You Owe rules borrowers must have the new Closing Disclosure form at least three business days before settlement. If there’s a major change then a new CD is required and the three-day period starts all over, meaning that closing can be delayed.
As it turns out lenders have a history of making the type of changes which today require a settlement delay. In 2014, says NAR, 3.2 percent of all ARMs saw an initial rate increase of at least an eighth of a percent while 1.5 percent saw a product change, changes made within three days of closing.
Meanwhile, buyers and sellers chug along, looking for the best deals. The new rules seem to have had little practical impact on the consumers’ end of the lending process, the end which in their eyes is the one that counts.