The Secondary Market Overview: From bonds to production ... The Good Faith Estimate and rate risk
There is no doubt that one of the biggest changes a typical loan officer is dealing with today is implementing the new and revised Good Faith Estimate (GFE). That is saying a lot because there are so many changes that are being implemented in this challenging environment. These examples include the Federal Housing Administration (FHA) tightening up their policy significantly to include a minimum credit score of 580 for those who are using a 3.5 percent downpayment, lower seller contributions to three percent, higher upfront premiums and an audit system that is going to make every lender scared of running afoul of FHA guidelines. It also includes a National Licensing and Registration System that will result in fingerprinting, credit reports and testing for loan officers across the nation. There is certainly a lot on the plate for every loan officer this year. The “new” GFE brings several changes. For one, it is a standardized form like the HUD-1 (and there is a new HUD-1 as well). In the past, the form has taken many formats, varying from lender to lender and software platform to software platform. It is also expanded to three pages and includes a “lump sum” for all lender charges. For brokers, it will make the use of a yield spread premium (YSP) transparent by showing the applicant how the YSP gets credited to their closing costs, which includes the broker’s charges. We could spend four pages talking about the new GFE. However, this is a column on the secondary markets and how these markets affect the production and revenue of loan officers. So, we will focus on one little-noted, but very important, part of this form. This is Line 1 of the first page of the form: 1. The interest rate for this GFE is available through . After this time, the interest rate, some of your loan origination charges, and the monthly payment shown below, can change until you lock your interest rate. This may not seem like a very important part of the form, but let us examine two very important points: 1. Most applicants will be “floating” when the GFE is made out. 2. The U.S. Department of Housing & Urban Development (HUD) has made it clear that the loan officer can only put “N/A” in the blank when there is no lock available for the program. If there is a lock available, a date must be placed in the blank. In other words, the loan officer is going to have to take the risk on a floating loan every time a GFE is issued. How much risk? It may be hours (or even a day or more) for the form to be delivered to an applicant. Here is the good news. HUD will let us not only put a date in the form—but also a time. The following is a direct quote from HUD’s Real Estate Settlement Procedures Act (RESPA) office … “The regulation does not prescribe the amount of time the interest rate must be available in the first box in the ‘Important Dates Section’ on the initial GFE. That is why you can put a date and a time in the box. It cannot be zero, and must be an actual date and time.” —David L. Friend Esq., office of RESPA and interstate land sales, U.S. Department of Housing & Urban Development (HUD) Therefore, “N/A” is not appropriate and “zero” is not appropriate. It must be an actual date and time. Theoretically, since the date could not be expired when the applicant receives the form (or it is sent out if mailed), even two hours of risk is a major risk. Who is to say that the market does not move by 100 basis points in one hour while you are in the loan application? Before this time, you could always say at the end of the application, “Now, I will check rates.” Now, at the end of the application, you cannot say that. You have to honor the quote of the GFE you have compiled. How much would the loss be on a $300,000 loan? A 100-basis point loss would be $3,000. Can you afford that risk on every loan? Apparently, HUD thinks you can. So unless HUD comes back to its senses, it is incumbent upon every loan officer to stay on top of the markets. You better know what the markets are doing when you fill in the form and if the markets are moving while you are in a loan application, you better know that as well. I asked Eric Holloman, our secondary expert and chief executive officer of RateLink, what they do in order to keep their clients informed. RateLink has been around for almost two decades, and therefore, they were doing such before the Internet was an option. Here is Eric’s reply: “Before the Internet and cell phones, we used pagers to let our clients know that changes were occurring. Believe it or not, some of our clients from that period are still using that technology. Now, when the markets are moving, loan officers are more likely to ask us to alert them that a change is coming via text messaging on their cell phone. But it is not enough to alert them that the markets are moving. We must also give them word of what economic releases are due the next morning. Many loan officers take loan applications at night and they need to know what may move the markets in the morning.” In other words, looking on the computer is not enough. You must have a system that will keep you up-to-date from moment to moment. For example, one that will send a text message to your phone as soon as the markets move a certain amount. If ever there was a time for this system to be implemented, the new GFE seems to have made it mandatory. Eric has consented to allow our readers a 30-day trial of such a system, just go to www.RateLink.com in order to try it and feel free to e-mail me at [email protected] to let me know what you think of the system, and more importantly, how are you limiting rate risk with the new GFE. If you have another tool or method of limiting risk, we need to get this information out to as many readers as quickly as possible. Many lenders are not even aware that “N/A” is not an option. Dave Hershman is a leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. Dave’s Certified Mortgage Advisor Program can be found at www.webinars.originationpro.com. If you would like to stay ahead of what is happening in the markets, visit ratelink.originationpro.com for a free trial.