Real Estate World to Come to a Dead Stop in August
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Will sales be crashing? No. Will rates be going through the roof? No. Will the tax credit disappear? No. So what could really be so bad you ask? A change to a little something called Reg Z.
Reg Z (or Regulation Z to be more correct) is the part of banking law that requires lenders to give consumers things such as good faith estimates of closing costs and also the Truth-In-Lending form, which contains the APR (Annual Percentage Rate), one of the more confusing aspects of the mortgage world for consumers to understand.
In an overly simplified way, APR simply tells a consumer how much it’s going to cost them to borrow the money over time based on the loan’s interest rate and certain fees or closing costs. The original intent was to create a formula that consumers could use to compare different loans where, for example, one had a lower interest rate and higher fees compared to a loan with a higher rate but lower fees.
The theory behind it was fine when they created it, but for the numbers to work you must assume the borrower stays in the mortgage for all 30 years and never makes any extra or additional payments. Well, the average loan lasts more like 5 years and many home owners in America want to pay their loan down earlier so they make extra payments. Both of these factors are not taken into account in APR.
Anyway, that’s not the real issue to be concerned about right now. What is troubling are the changes to this Reg Z that goes into effect on July 31. Going forward from that day, lenders must disclose a final APR to a borrower 3 business days before closing–not too different from what the requirements are today–BUT, if the APR goes up or down more than 0.125% (also called 1/8%) the APR must be re-disclosed and the borrower’s loan can not close until 3 business days have passedsince the re-disclosure.
So, if something changes in the costs or interest rate of the loan, the closing must be pushed back. The only exception is if a person would be losing their home to foreclosure because of the delay. How likely is it for this size change to occur?
The reason this is a problem is lenders are hard pressed to even get loans approved on time for closings. This change will require them to be squared away 4 days before the closing was even supposed to happen. Even if the lender does their part, the APR can’t be finalized until the title company does their job and issues the HUD-1 Settlement Statement. Normally a simple thing. But, in today’s world, if you are buying a bank owned home the bank often requires they approve the HUD before it can become final, and if they take too long to do this it will cause the numbers to shift and closing will be delayed.
Almost none of the mortgage companies I surveyed have done anything yet to prepare for this change, and it’s only a month away. So that means it’s really likely that when these companies go to close loans in August they won’t have tightened up their systems enough to ensure the numbers won’t change too much.
How much do things have to change to push it pass the threshold? Not much at all. Here are 4 examples to show just how easy it is for the APR to move 0.125%. The first 3 examples use the same basic scenario: $100,000 purchase price, with 20% down, so a loan amount of $80,000 on a 5.0% 30 year fixed rate.
1. If the interest rate were to go down or up 0.125% because the rate had not been locked in yet, that would move the APR more that 0.13%–forcing the closing back 3 days (6 days if the disclosures are mailed rather than emailed or faxed).
2. Borrower comes up a little short on cash for their down payment and now would need a loan for $81,000. This would also now require mortgage insurance since there is less than 20% down. The APR just went up more than 0.14%, closing must be delayed.
3. Let’s say something goes wrong during the final walk through, and now the seller is going to pay $3,000 toward closing costs to make up for the problems. This would drop the APR more than 0.15%, and would need to be re-disclosed and the closing date pushed back 3 days.
4. For this example we’re going to use an $80,000 price with 10% down, so a $72,000 fixed rate loan at 5.0% over thirty years. If the seller was to contribute $2,400 (3%) toward closing costs, the APR drops 0.2% and now needs to be redone. Or, maybe the lender made a mistake and they want to give a $1,000 credit toward closing costs for the borrower. APR would drop 0.13% and now the closing would need to be delayed.
So, the real question is, how often does the APR change? All the time. It’s not uncommon that the final APR is being determined at the closing itself because finally everyone’s fees have to be in and no one can change them, not the mortgage company, the title company, and so on. The practice of finalizing the APR at closing is no longer an option.
The worst part about these changes to Reg Z is that it will likely create some sort of “doom loop,” where one change causes the numbers to vary too much and then as the closing slides back a new change shows up pushing the closing “clock” back another 3 days and you could very quickly loose weeks over a few simple changes.
In the end, much of the disaster could be avoided if mortgage and title companies were more dead on accurate with their costs estimates. But, everyone is understaffed because of the trying economic conditions, so errors are more likely to show up, especially when they are simple one because all of our time is focused on avoiding any major disaster. But now, we have another major disaster to try and avoid.
Consider this another question to ask your potential lenders as you look for your mortgage. What steps do you have in place to make sure my closing won’t be delayed because of an error in disclosing my APR?

