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from Local Attorney, Michael H. Wasserman

Wednesday, July 1, 2009

New government regulations may well dictate when you will close your next transaction

A big hat-tip to Wells Fargo Mortgage Consultant Martha VanBendegom for sharing information with me, so that I can share it with you.

Everyone knows that a Buyer and Seller set out the terms of their real estate deal by writing and signing a contract. All agreed terms get spelled out, including the sales price and the closing date.

The parties set the closing date in the contract. It gets written in stone, so to speak, no? Well, more written in sand than stone. Sand on a shoreline smacked over and over again by pounding waves of mortgage rules and procedures. Waves that erode the shoreline of that contract, and that will all but wipe those closing dates clean off the beach.

Regulations spawned by the Federal Housing and Economic Recovery Act of 2008 go into effect at the end of July. The new regulations, coupled with Fannie Mae & Freddie Macs recent implementation of the Home Valuation Code of Conduct are going to take that "false illusion" of a fixed, certain, closing dates clear out of great many transactions.

Buyers and Sellers who rely on a contract closing date when they arrange their moves-in and moves-out are likely going to be in for big, frustrating, costly surprises. Savvy lawyers, realtors, and especially loan officers better start spreading the word, so that there clients are not adversely impacted, or disappointed by the delays that will inevitably follow.

According to the Wells Fargo summary, there are a couple of key points everyone is going to need to understand. My thoughts follow.

  • These changes are only going to apply to residential transactions - first and second homes purchased with mortgage financing (and for re-finances as well).
  • The EARLIEST date that a contract can close will be 7 business days AFTER the buyer receives mortgage initial written disclosures from the lender. (truth in lending, good faith estimate, fair credit, etc.).
  • Lenders will not be allowed to collect upfront fees for appraisals (any upfront fees at all - other than for credit reports) until the next business day AFTER those initial disclosures are received.
  • Closings cannot take place until 3 business days after Homebuyers receive copies of their appraisals (at least this requirement can be waived).
  • New Truth in Lending disclosures will be required if a buyers interest rate (technically, the APR) changes by more than 1/8th% from an initial disclosure. If necessary, closing cannot take place until 3 business days after it is received. If the lender mails that new TIL, it is considered "received" 3 business days AFTER the mailing date.
So what does all this mean? Well, on the one hand, a contract is still a contract. A binding set of promises & obligations undertaken by the Buyer and the Seller. That contract specifies a closing date and if the Buyer's loan is not ready to go, the Seller is (as now) going to have a right to sue the Buyer for a breach of the contract. But really, the Seller didn't sign-on to sue anyone. The Seller just wants to sell and wants to know when that sale is going to happen. If it cannot happen until the loan is ready, the seller (more often than not, certainly) is going to have to just "hang-in" and wait for the loan to get done. Sellers will be entirely at the mercy of the Buyers, Lenders and Title Companies in terms of this sort of regulatory compliance.

How will this impact buyers?
  1. Any buyer who does not intend to apply for a mortgage loan, in person, is going to see longer processing times on their loans. The waiting times increase when documents and checks pass back and forth by mail. Delays will become the new norm in such instances.
  2. Anyone who does not lock-in an interest rate, who changes loan amounts, who changes loan programs, or takes time after the contract is signed to decide what type of loan they want (or who's lender suddenly discontinues or changes the intended loan program), and those who decide to add a second mortgage into the mix), will need new/updated Truth in Lending Disclosures and will force mandatory three day waits for closing. In my practice, that seems to cover about 90-95% of all mortgage-financed transactions.
  3. Poor communication between loan processors and title companies will lead to inevitable last minute changes on TiLs, to include charges for new or additional title searches / services after the initial TIL is given out, that will trigger the waiting periods. Again, in my practice, this is the case in an overwhelming majority of cases (but not so, with certain highly regarded and well organized lending institutions.
  4. Title companies change in fees for services will automatically trigger the same.
  5. Appraisals will be ordered even later in the process, since Buyers will be unable to pay for them at the time of a first meeting with their loan officers and many lenders refuse to order them without a buyer's cash in hand.
Real estate agents and attorneys representing clients - on both sides of the deal - and loan officers will all have to make sure that their clients understand the timing ramifications of these new regulations to make sure that expectations of a closing happening on time are realistic.

Buyers will be best served by (a) applying for their mortgage loans in person, (b) using highly reputable and well established loan officers (c) who communicate regularly and reliably with their borrowers, attorneys and agents. Sellers, attorneys, agents, and title companies will be happy too.

Let me know if you have any questions about the new regulations or how they may impact your Chicago-area home deals (or your client's deals as well). I can also help you find those highly sought after "good" lenders who will minimize the inconvenience these new regulations will cause, and can help you deal with those not-so-good ones, and the consequences of lender delays too.