HUD officials say they plan to conduct a review of the growing use of “worksheets” and “fee estimate” forms by mortgage lenders providing quotes to home buyers and refinancers since the first of January.

The worksheets are a reaction by the mortgage industry to HUD's tough new “good faith estimates” (or GFE) rules that went into effect on New Year's.

HUD's revised GFEs require loan officers to provide accurate estimates of their origination fees and expected settlement costs.

If there are significant deviations from the GFE, which must be issued within three days of a mortgage application, and the HUD-1 settlement sheet, the lender must eat the difference.

That's in stark contrast to earlier rules, which essentially allowed some lenders to quote low estimates of total costs, with no responsibility for the final dollar charges at closing.

Homebuyers sometimes found that they owed hundreds -- even thousands -- of dollars more at closing than was estimated up front. Those eleventh hour settlement surprises prompted HUD to tighten the rules.

The revised GFE also was explicitly designed to serve as consumers' primary shopping tool to compare home loan quotes. The form contains space for quotes from up to four competing lenders.

The January first start date for the toughened GFEs upset lenders who feared monetary losses if they didn't get their estimates right up front. To lessen that risk, many companies began offering rough estimates that come with no penalties if they are inaccurate.

Homebuyers who inquire about a lender's rates and fees, but do not submit a formal application including property address and Social Security number, are now receiving what are essentially unregulated estimates with no guarantees.

Loan officers defend them as a useful tool for handling shoppers who may not be ready to provide all the required application information.

“I think they're a great idea,” said Marc Savitt, past president of the National Association of Mortgage Brokers. “If somebody is just shopping, we give them an 'initial fees worksheet.' If they make a full application, then we need to issue a GFE.”

Vicki Bott, HUD's deputy assistant secretary for single family housing, said the rules do not address “worksheets,” but said she would look into how they are being used by the industry.

If they are misleading home buyers or lessening the legal protections provided to consumers by the reform rules, “we will need to reach out to the industry” and issue “updated guidance,”she said.

Here's our guidance to buyers and realty agents in the meantime: Be aware that here's a BIG difference between informal cost estimates and a real GFE.

Published: January 18, 2010

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.