The Closing Process Has Changed

The real estate closing process has changed. For those of you that don't know, the "closing" is just the final meeting in which the buyers and sellers review all of their final documents, review their loan packets for the last time, sign those forms and actually take possession or transfer possession of the home.  Fortunately for the consumer, the closing process has changed for the better.  It is causing some stress and anxiety amongst real estate professionals as we get used to the new structure, but it will be a change for the better. The changes actually took effect October 3rd. However, since most real estate transactions go into escrow for at least 30 days before they close, the new system will soon be experienced by buyers, sellers and real estate professionals. Before I explain the new process, let me explain the old one. 

Stay with me here because this can get a bit confusing:

The old process required disclosures from the lender about the costs of a mortgage, which was brought on by TILA (The Truth in Lending Act). The old system required that the lender deliver to the borrower a disclosure known as the GFE (Good Faith Estimator), which was a preliminary estimation of how much the borrower would owe the lender and their monthly obligation (there were actually four separate disclosures that had to be delivered to the borrower throughout the process by the lender, but those were less crucial than the HUD-1 and the GFE). The old closing process required all of the important information and fees to be disclosed in the "HUD-1 (AKA HUD)," which was a slightly confusing document designed to chart all of the fees and costs associated with the purchase or sell of the home. The HUD, which is the map of all of the costs and credits that are involved in the purchase of the home, was a result of RESPA (Real Estate Settlement Procedures Act).  In 2013, it was revealed by the CFPB (Consumer Financial Protection Bureau) that in 2015 the major disclosures (brought forth by TILA and RESPA) would be combined into two new disclosures known as TRID (TILA-RESPA Integrated Disclosure) to be delivered to the borrow at two crucial moments in the process. Not only would these disclosures be combined, but they would be streamlined and made easier to understand for the borrower. The point of TRID is to protect the consumer. It was enforced by the Consumer Financial Protection Bureau, after all.

Got it? Let's move forward:

At the end of the day, TRID is used to make certain that lenders disclose to the borrower exactly how much their mortgage will cost and that those figures stay the same or extremely close by the time the borrower is ready to close on their new home. TRID is going to map out all associated closing costs like attorney fees, Realtor fees, insurances, taxes and will be much easier to understand. But, it's also going to make the entire process of disclosing related mortgage costs and fees innumerably easier for the borrower to understand.

I recently read an article from CNN Money titled, "How The Mortgage Process Just Changed" that explains some of the changes and shows images of the new forms. One of the biggest differences now is that the lender has to provide a "Loan Estimate Form" to the borrower within three days of them submitting their mortgage application. Once the borrower has received this form, they can visit other lenders to compare the costs. The Loan Estimate will not have a ton of information. The Loan Estimator will mainly disclose the cost of the monthly principal, interest and mortgage insurance (if needed), as well as some associated lender's closing costs. 

The next disclosure is the "Closing Disclosure Form" and it will have to be delivered to the borrower no later than 3 days prior to the closing. The purpose of this document is to disclose to the borrower how much they are actually going to pay and give them the opportunity to contest any issues with those costs. The borrower should compare their original Loan Estimator Form to the Closing Disclosure Form and insure that there are no discrepancies between the two, unless the lender and borrower have already come to terms with changes earlier in the process. 

All in all, this is a good change. It is meant to protect the borrower and provide more transparency to the borrowing process. The borrower will more easily be able to see what they're paying for and what those charges mean, rather than being told that they owe Y and not X at the closing table. However, the entire real estate industry is anxiously preparing for this new process. It is going to be challenging. Essentially, our entire closing process has been uprooted and our familiar ways are gone. The mortgage providers are really taking the brunt of the responsibility here, but both the agents and attorneys have to make some changes, too. The agent is now encouraged to satisfy all contingencies as early as possible and acknowledge them to the lender. We are also being told that we should extend the entire escrow period by at least 15 days to make room for these 3 day periods on the disclosures. That means that a typical transaction will not take 45. The attorneys are now asked to complete their title work as swiftly as they can and return that to the lender so they can factor those charges into their Closing Disclosure. I only say those last few things to encourage anyone buying a home in the next couple of months to be patient with their friendly real estate professionals as they learn the new operation. Once we are all familiar, this will be a great improvement that will help out the borrower in major ways!

As always, if you or anyone you know needs help buying or selling a home, I would be glad to help. The fall is a great time to buy or sell as the inventory in the market starts to thin out. It means both more negotiating power for the buyer and less competition for the seller. Let me know if you have any real estate questions or concerns!


Troy Franklin Gandee

Foreclosure Listings Are On the Rise

Foreclosures are a fickle thing. First and foremost, they are terribly unfortunate for the home owners that have to go through that process. Foreclosures are an inconvenient truth for lenders. In most cases, the home is being repossessed by the lender due to the owner's lack of ability to make their monthly mortgage payment for 90 consecutive days. Once this happens, the bank begins the foreclosure process. The home owner always has the ability to regain control of the property if they are able to pay the back balance of their missed payments. However, this is rare. Usually, it is a series of their own unfortunate events that leads to someone losing possession of their home. However, due to the faulty loans that were created before the financial crisis, many homeowners with "sub-prime" mortgages never stood a chance. Throughout 2004-2008, many people bought properties using loans that were predatory in nature and have had a difficult time honoring their payments. Thus, those homeowners lost their homes to the banks. Those lenders have been punished and prohibited from funding those types of loans. Many feel that the recent recessions is mostly due to that sort of reckless lending.

Once the bank has taken back possession of the property, they sit on it for quite some time. They have a myriad of asset managers and accountants that need to process information and often their corporate machines gobble up the properties for an awfully long time.  Eventually, the bank contacts a local affiliate Realtor to list the property. An alternative term for foreclosed properties is REO properties. REO = Real Estate Owned. This is the terms that we most often use regarding foreclosures. REOs refer to a foreclosure or any other property that is controlled by a bank or lender, rather than a conventional home owner.  The REO listing is then listed on the MLS and offered to the public. One misconception associated with Foreclosures is that they're always a great deal. The whole point of the bank listing the property is to cover recover what they lent on that property. This means that they have a bottom line and they intend on recouping their investment. If the old mortgage holder owed more than the house was worth (which is common with sub-prime mortgages) then the bank will have to try to net more than the house is actually worth in today's market. Many people buy foreclosures solely because they think they're a great deal and later find that they paid far too much. Also, most people leave foreclosures in really bad shape and the new owner must sink money in to the home to even male it livable. 

The reason that I'm writing this article is because I just read and article from Realtor Magazine entitled, "REOs Are Back and On The Rise." The article finds that July showed foreclosures to be up 7% from June and 14% from July of 2014. The hope is that this might be the last swath of foreclosures due to sub-prime mortgages. The rise in foreclosure listings last month was due to what seemed to be a rush in the banks repossessing properties to offload them on the market. Like I said before, the foreclosure process takes much longer than most people realize. The article points to the average days of a foreclosure taking 629 days. In many cases, they bank can initiate certain parts of the process to speed up the foreclosure, which seems to be what has been happening recently. The number of new foreclosures is actually at it's lowest level since 2005! 61% of these bank repossessions were originated in the pre-crisis economy, which are those sub-prime mortgages again. I believe that the banks were taking notice of the housing market becoming competitive again and decided to push through to offload much of their inventory to the droves of motivated buyers that have been active in the market recently.

The great news is that the number of new foreclosures is very low in comparison to previous years. This is due to tighter regulations forbidding banks from providing predatory loans to the public like in the '04-'08 economy. The good news is that if you're interested in foreclosed properties, there is a new surge in available foreclosed properties and there should be more coming (keep in mind that those are not always a bargain!). There has been some speculation that the increase in reverse mortgages and home equity lines of credit might create another surge of REOs in the future, as well. If you have any further questions about REOs, let me know! I'll do my best to answer them.

And as always, if you or anyone you know if interested in buying or selling a home, let me know! I'm more than happy to help. The market is very competitive right now and having a great Realtor is more important than ever. 

Thank you!

Troy Franklin Gandee