In October, a new set of rules came into effect for residential real estate closings in the U.S. involving mortgage financing. The most visible aspect for buyers/borrowers is that the “Truth in Lending” statement and the HUD-1 form (which itemized closing costs) have been replaced with new Loan Estimate and Closing Disclosure forms that integrate multiple forms. These two new forms are designed to make costs and terms much clearer to borrowers (the old HUD-1 form was particularly obtuse) and eliminate any last minute “bait and switch” in loan terms (a particularly noxious practice in the past) or unexpected closing cost surprises. But the new rules go much deeper than just the forms that borrowers see. A lot of procedures are also changing. I’ve read that the full rule spec runs to 1,888 pages!
The biggest procedure changes are new notification rules. Borrowers have to get the loan estimate 3 days before committing to the loan and the Closing DIsclosure 3 days before closing. Who’s responsible for what has also changed. The lender is now responsible for the preparing and delivering the Closing Disclosure, not the closing attorney or settlement agent. That’s a huge change, requiring lenders to ramp up staff with a new skill set. That’s a particularly big challenge for national lenders that lend in hundreds of different areas in the country, each with idiosyncratic closing costs. For example, in Florida most transactions close “in escrow” without an attorney on the buyer side, but in New York, for most closings the buyer has an attorney. How does that attorney fee get onto the Closing Disclosure? Likewise, in rural areas in New York, a survey is almost always a requirement and the cost can vary considerably. Previously, the local closing attorney would get that from the buyer’s attorney and add it to the HUD-1 closing statement. Now, who asks for that and where does it go?
The real estate industry has had close to two years to prepare for this monumental shift. Countless millions of dollars have been invested in software updates and training. But even with all the best planning, there are a myriad of unanticipated issues in a major system and paradigm shift. Also, over the past two years there have been a lot of tweaks and revisions to the rules. So if a real estate attorney took a continuing ed on the new procedures earlier this year, they may have changed. Even if everybody is on board with the final rules, there’s going to be a lot of “can we, can’t we” interpretation until there’s more familiarity with the new procedures.
The bull’s eye target of all this is lenders, and right now they’re really cautious and conservative. Underwriting turnaround (the time from appraisal receipt to conditional commitment), which typically is about two weeks, is running closer to four — whether it’s a big national or smaller local lender. Buyers are being asked to repeatedly update income and asset documentation; again both big and small banks. I’m hearing stories closings being rescheduled because of changes in the Closing Disclosure, and the lender playing it safe by restarting the notification clock.
This is one of the biggest changes in real estate settlement procedures in decades, and it’s a bit of a mess right now. I liken it to the roll out of Obamacare (and in the real estate business, it’s that big.) It was really bumpy in the beginning, but then it smoothed out. The banks will adjust their staffing. Real estate attorneys and closing agents will figure out who has to get what when. The government will start fining some errors and turn a blind eye to others. In six months, everyone will have a good feel of the ground rules, and will settle into a routine. But right now, everybody is gun shy. Borrowers closing on mortgages in the short term unfortunately are the guinea pigs. If you’re a buyer closing with a mortgage between now and the end of the year, you may encounter some turbulence (and almost certainly some delay.)