A change in federal regulations is complicating the process of closing real estate sales and already has delayed one closing in Steamboat Springs.
Ed Allbright, of Columbine Mortgage, said the first mortgage he has initiated - since the new truth-in-lending regulations went into effect Aug. 1 - was delayed by an innocent clerical error by the mortgage underwriters. The error led to a mandatory waiting period meant to protect consumers and delayed his clients' closing date from Aug. 17 to 21.
"This was a refi, but if it had been a purchase, it could have been really ugly," Allbright said.
Even though the underwriters quickly recognized the clerical error that doubled Allbright's estimated closing costs, under the new regulations their computers locked them out of correcting it, and a new truth-in-lending waiting period was invoked.
Money on the line
When a deal fails to close at the eleventh hour, hard-earned currency in the form of interest rates and earnest money is on the line.
The increasing number of hurdles that must be cleared to obtain home loans - mortgage lenders are saying they must do twice the paperwork they formerly executed - is being posed by the Housing and Economic Recovery Act of 2009, or HERA, which was passed by Congress in 2008 and went into effect this month.
Veteran mortgage lenders here say they expect problems to be exceptions. But they agree real estate purchasers could potentially risk their earnest money if the delay pushes them outside the time limits in their contracts. In other cases, borrowers could find that the mortgage rate they thought they had locked in had expired because the 30 days locking period had expired.
In the case of Allbright's client, the financial institution that did the underwriting and committed the error, made his client whole by extending the rate lock. Had the error been his, Allbright said, restoring that interest rate could have cost $2,000 to $3,000.
The new federal regulations were intended to protect borrowers from unscrupulous lending practice, but Allbright thinks it's overkill.
"It's a problem that affects one out of 100 or 200 people, but (the new regulations) cost everyone more money and time," Allbright said.
"It's unfortunate," said David High, a mortgage broker with Alpine Bank in Steamboat Springs. "There's already so much accountability among lenders. This is designed to eliminate the ability of disreputable lenders to take advantage of clients. There's a chance it will do nothing but create more problems."
Still, High doesn't expect the new regulations to create problems for the majority of borrowers.
"It's not a deal-killer," he said.
Federal regulations have long required that borrowers be provided a truth-in-lending disclosure detailing the terms of their mortgage. They must be given adequate time - seven days - to study the terms before closing.
With the new regulations, Congress has taken action to ensure homebuyers get updated on changing loan conditions right up until the closing of the transaction. They are meant to protect them from unpleasant surprises at closing.
Specifically, the HERA provisions say that if the annual percentage rate of a mortgage - or any loan for that matter - increases more than 0.125 percent, or by one eighth, the lender must reissue an updated truth-in-lending statement and give the customer an additional three days to study it.
The APR is a combination of the mortgage rate and a variety of fees associated with the loan, including the origination fee.
Even in an era when mortgage rates - the current national average is 4.4 to 5.5 percent - can fluctuate by a quarter or even a half of a percentage point daily, mortgage lender Holly Rogers, of Yampa Valley Bank, said a change in mortgage rates isn't likely to kick in an additional truth-in-lending wait and delay a closing date.
Lock in early
That's because more than ever, lenders are urging borrowers to lock in their rate well in advance of the closing date. If anything, borrowers may find it impractical to satisfy that urge to wait and wait for interest rates to come down an eighth of a point before locking in.
High is optimistic clerical mistakes, like the one by the underwriter involved in Allbright's deal, will be the exception.
"You have to be diligent about planning, but I don't think it will be that big a hassle," he said.
One likely downside of the tighter restrictions on truth-in-lending statements, High said, is that borrowers will lose the flexibility they once enjoyed to change the terms of their loan on the day of closing. For example, they won't be able to choose to pay higher points at the last minute, in order to get a lower interest rate, or vice versa.
Allbright said mortgage brokers may find they have to build an additional 15 days into the loan process. And the cost to the consumer of a 45-day lock-in period vs. a 30-day lock could be on the magnitude of $750.
The ultimate inconvenience of a delayed closing because of a measure intended to protect consumers, Rogers said, would be the loss of earnest money because the buyers have failed to close under the terms of the contract. For that reason, High is suggesting that selling Realtors investigate the possibility of building an automatic extension into contracts that kicks in when clerical errors occur.
In the long run, Rogers thinks problems created by HERA will be rare. Even though an eighth of a point, or 0.125 percent, sounds like a tiny margin for error, it's bigger than people might think.
"It's a big swing in terms of fees," Rogers said. "You'd have to have a pretty big discrepancy for that to happen."
Most of the fees that contribute to the APR, she explained, are tiny - $200 and $150, for example, relative to the purchase of a $300,000 or $500,000 home.
The exception would be the origination or discount fees, sometimes amounting to 1 percent. But those are the fees that conscientious local lenders have the most direct control over.
If anything, Rogers said, the new truth-in-lending requirements may level the playing field between local lenders and Internet lenders.