The good faith estimate of closing costs that lenders are required by law to give borrowers within three days of their mortgage application is supposed to put a stop to growing closing costs. But a survey taken this year shows the rules don’t always work as they should.

Lawmakers already recognize that, which is why regulators were directed under the Dodd-Frank Wall Street Reform and Consumer Protection Act to revamp the good faith estimate, as well as the HUD-1 settlement sheet that borrowers receive at closing.

Accuracy is higher than it used to be, but it still leaves a lot to be desired, according to a survey of 205 closing agents by the American Land Title Assn.

Although the poll is too small to be statistically valid, title professionals are in a position to address on the topic because of their involvement in closings. And it shines a light on several practices that violate Section 5 of the Real Estate Settlement Procedures Act.

Under that law, lenders’ estimates for services rendered by third parties such as appraisers and surveyors are supposed to be within 10% of the final figures. If the charges listed on the HUD-1 exceed that, lenders are required to eat the difference.

But nearly 3 of 4 closing agents who responded to the survey said lenders sometimes pad their initial estimates so they can be certain that they are within the 10% limit at closing.

“Over quoting” violates the spirit of the law, if not the law itself, which is intended to empower consumers to protect themselves from being gouged at closing, said Michelle Korsmo, chief executive of the American Land Title Assn. Even if borrowers are never charged for things like document preparation and warehouse fees, giving false information prevents consumers from making accurate comparisons when they shop for closing services.

Another troubling finding: More than half of the respondents said they’ve been pressured to cut their fees to help lenders avoid tolerance violations at closing.

Just as real estate agents don’t like being forced to cut their commissions to make deals work, title agents don’t like being told to slice their fees. But they don’t have a lot of power to push back against the companies that help them find clients, Korsmo says.

So what’s the point of the good faith estimate anyway, if consumers aren’t going to use it?

One northern California real estate agent might be forced to get comfortable in a small jail cell after being convicted of mortgage fraud.

Behrooz Badie, 53, a Sacramento real estate agent, was found guilty Wednesday of 13 counts of mail fraud following a six-day mortgage fraud trial in federal court.

Badie, with co-defendants Derek Davis and Dino Rosetti (both previously pleaded guilty), cooked up a scheme to defraud mortgage lenders and operated it for about 18 months before being caught, according to the evidence presented at trial.
Badie acted as the buyer’s real estate agent for the purchase of 16 residential properties by four straw buyers. Rosetti served as the mortgage broker for 15 of the purchasers, and Davis orchestrated the scheme.

With Badie’s assistance, Harriette Davis, Derek Davis’s ex-wife, purchased six homes. Kristina Harvey, Mr. Davis’s girlfriend, purchased five. William Emmons, an elderly friend of Mr. Davis, purchased four. Alan Bolton, a person to whom Mr. Davis owed money, bought one.

Each of the purchase agreements drafted by Mr. Badie indicated the offer was being submitted by one of the foregoing buyers who intended to occupy the property as his or her primary residence.

But that wasn’t part of the plan, testimony revealed.

For his part, Badie received more than $260,000 in commissions.

Badie is scheduled to be sentenced by U. S. District Judge Edward Garcia on Aug. 28. He faces a maximum statutory penalty of 20 years in prison.

High foreclosure rates and a strong rental market pushed the homeownership rate in the U.S. to a 15-year low, even as projections for the housing market grew brighter.

The 65.4% rate in the first quarter is down from the 66% rate in the fourth quarter and 66.4% in the first quarter of last year, according to the Census Bureau. Before the housing bubble burst, homeownership reached a high of 69.2% in 2004.

The current rate is low compared with the last decade partly because earlier homeownership rates were inflated by people who hadn’t made down payments and were really “renters with an option to buy,” said Richard K. Green, director of USC’s Lusk Center for Real Estate.

However, several reports in the last month suggest the outlook for the struggling housing market is promising.

Pending home sales are at their highest level since April 2010, according to the National Assn. of Realtors. Lawrence Yun, the group’s chief economist, said the market “has clearly turned the corner.”

Price declines are easing. Housing data provider Zillow said last week that home values are bottoming in most major markets and are set to begin rising in metropolitan areas such as Los Angeles.

And recent gross domestic product numbers showed improvement, thanks in part to investment in the residential market, said Patrick Newport, an analyst at IHS Global Insight.

Rents, however, are at a post-recession high at a median $721 a month. Vacancy rates at rental properties fell to 8.8% — their lowest level in a decade.

Young Americans are now heavily inclined to lease, rather than own, their homes. The rate of American homeowners ages 35 and younger fell to its lowest point since 1994 as many opted for leased apartments and shared spaces.

With the transition, especially in California, of buying to renting, what have you done to keep business driving forward?

Kamala Harris, the Attorney General of California, has been one of the leading advocates for many attempts to get the housing industry in California back on the right track.

Harris has long made combating mortgage fraud one of the centerpieces of her time in office. And now it appears as though she’s willing to take the next steps in the process – the California Homeowner Bill of Rights.

Harris is lobbying state lawmakers to pass a bundle of mortgage-protection bills, currently undergoing tests in legislative committees in Sacramento. These bills would give homeowners more security with their mortgages while allowing the AG’s office to have fewer restrictions when looking into financial crimes.

The new 11-bill bundle will ban those actions that contributed to the housing crisis and apply to all mortgage lenders.

“A lot of the reform… was agreed to by the banks in the national foreclosure settlement, but it only has a life of three years,” Harris explained. “Let’s not go back to the days of robo-signing… Let’s learn from our mistakes.”

In an obvious move, lenders are opposing many of the important elements of the bills, including the sections concerning homeowners’ due process rights, the expansion of the national settlement for all California homeowners and, perhaps most importantly, giving homeowners the right to sue banks if they feel they have been wronged.

Harris’ defense is simple – if lenders do everything properly, they won’t have anything to worry about.

The 11 bills contain components of six separate proposals, five of which are duplicated in Assembly and Senate bills.

Do you appreciate Kamala Harris’ continued pursuit of the Homeowner Bill of Rights?

Please let RE-Insider know.

It’s about time that the Consumer Financial Protection Bureau (CFPB) got its act together for consumers. On Tuesday, Director Richard Cordray announced that, by January 2013, there will be new rules in place that will protect borrowers by helping to avoid unknown costs and foreclosures.

Some of the new rules for servicers include:
• Issuing clearer mortgage statements monthly that will have an
itemized breakdown of payments by principal, interest and
• More disclosure for all borrowers from the servicers
• Explaining interest rates and how new rates are calculated,
when they come into effect, and warning of future charges and
penalties for paying mortgages off early
• Having to provide foreclosure counseling to those in need and
warn of changes in future interest rates and penalty fees

These new efforts are being put in place for myriad of reasons: to lessen the number of people facing foreclosure, to keep people in their homes, to monitor and lessen the incidences of “forced-placed” insurance (when the bank takes out property insurance for the homeowner), and to finally ensure the information on foreclosure documents are reviewed and correct to put an end to robo-signing.

Cordray said the new rules will ensure that consumers know at all times, “how much they owe, what they are paying, and how their payments are being applied.”

The new rules coincide with the decision made in February between the five largest mortgage lenders in the U.S. and some states attorneys general. The settlement deal they reached was that the mortgage lenders had to pay $25 billion to help those that faced or were currently in foreclosure.

Do you feel these new rules are enough to stop destructive practices by mortgage lenders? And are they coming too late?

Fifth Third Bank now joins Bank of America in the courtroom – both have, as of Friday, been hit with putative class action lawsuits claiming they gained millions of dollars in illegal referrals and kickbacks from private mortgage insurers.

The almost-identical suits have been filed in Pennsylvania federal court by the same law firms. In each case, the lenders are being accused on violating the Real Estate Settlement Procedures Act (RESPA,) reducing competition and boosting homeowner’s premiums.

From 2004 to 2011, BofA and Fifth Third Bank brought in millions of dollars in purported premiums but only paid out a fraction in claims. Fifth Third Bank received $54 mil in supposed premiums but paid less than $5 mil out in claims, while BofA got $285 mil and paid out around $59 mil. This helped the banks reduce their own risk while leaving insurers taking on almost all of the risk themselves.

Along with BofA and Fifth Third Bank, other defendants named are six private insurance companies, including United Guaranty Residential Insurance Co. and PMI Mortgage Insurance Co. BofA additionally named Triad Guranty Insurance Corp. as a seventh insurer.

It seems BofA and Third Fifth Bank are just following in the footsteps of HSBC USA Inc., which faces the same sort of suit, filed March 12. Finally, those greedy companies may finally have to pay up for what their actions have caused the people, the housing market and the economy.

Do you think the banks have a chance at winning the suits?