New MORTGAGE
Information - Important
On August 1st, there will be a new roadblock to closing on a
house
New integrated disclosure forms will wreak havoc in the
home closing process.
On Aug. 1, 2015, the new
TRID (TILA-RESPA Integrated Disclosure) forms replace the HUD-1 Settlement
and Good Faith Estimate. The Consumer Financial Protection Bureau’s
mission is to rebuild the mortgage banking landscape so that the industry will
avoid the type of conditions that led to the Great Recession. The CFPB replaces
the Department of Housing and Urban Development for oversight because HUD
did not provide specific consumer protection.
Everyone agrees that increasing consumer protection is a
desirable goal. Nevertheless, the unforeseen ripple effects from these changes
could seriously disrupt how the closing process is conducted.
The new rules will require a new three-day waiting period
when there are any changes in the TRID forms. The recommendation is to
allow an extra 15 days to close your transactions. In other words, 30-day
contracts will now require 45 days, and 60-day contracts will require 75 days.
Who will be hit the hardest?
The states that will be hardest-hit are those where the
agents or principals must be physically present for the closing. “Escrow”
states, like South Carolina, where the
documents and signatures are normally submitted a few days prior to closing,
will be less likely to have issues.
In “closing table” states, clients, agents and attorneys are
accustomed to routinely making changes at the closing table and still closing
the sale on same day. The new three-day waiting period will severely limit this
practice for items covered in the TRID documents.
The biggest headache: the moving van
When transactions don’t close on time, it’s common for one
or more of the principals to be stuck with furniture on a moving van and
nowhere to go. Any agent who has experienced an irate client in this situation
knows how nasty this situation can be.
In most cases, these issues are resolved and the transaction
closes the next day. Nevertheless, more than one agent has footed a hotel
bill for their clients (especially those who are relocating). Moreover, if
there are multiple properties involved, any delay on one home’s closing could
delay others from closing, too.
Now imagine how much more complicated this could become if
there is an error that retriggers the three-day TRID waiting period. Everyone
will be scrambling to handle late closings — not just for one day, but for at
least three days or more.
If this happens, can you allow the buyers to move in
early? If so, you must enter into a separate lease agreement or Right-to-occupy
prior to closing, then collect the first month’s rent plus a security deposit
to protect both the buyer and the seller. Given how tight some buyers are on
cash at closing time, this may not be an option.
Other potentially costly issues include situations where one
of the principals must close by a certain date to take advantage of the tax
breaks on the sale of their primary residence — or situations where one of the
principals is involved in a 1031 tax-deferred exchange. The lost tax-benefit
costs of a late closing could run into hundreds of thousands of dollars.
Interest rate games
If you have been in business for more than 10 years,
you have probably experienced the shenanigans that some lenders pull when the
interest rates increase. In fact, I have personally witnessed the scenario
described below since the early 1980s. Here’s what happens:
Your buyer locks in an interest rate for 60 days. There is
an increase in the interest rates. This means that the lender can no longer
sell the buyer’s loan on the secondary market. As a result, the lender demands
additional documentation. You submit the documents in a timely matter, but the
underwriting department takes days to get to your changes. In the meantime, the
buyers’ interest rate lock expires, and the property doesn’t close on time. At
this point, the lender requires a higher interest rate in order to close the
transaction.
It doesn’t take much imagination to see how easily this
could play out with the new TRID three-day waiting period.
A tough transition
What will be particularly thorny are transactions closing in
late July. If they fail to close by Aug. 1, 2015, how will they be handled?
Does entirely new documentation have to be drawn? How long will the delays be? Even lenders can’t answer these questions
yet.
As we move closer to the Aug. 1 change date, clients need to
know that there will be unexpected delays in obtaining loan approval, potential
changes in the documentation during the transaction, and a host of problems I
probably can’t even begin to imagine. When closing on a property with a
mortgage you should always expect the unexpected, however these changes will
impact all closings and will cause delays.
Set your mind to accept these changes, communicate often with your
Realtor and Lender and you should still be able to enjoy the experience. Better Start preparing now.
