"I'm From the Government, and I'm Here to Help"

Ronald Reagan once said that the nine most terrifying words in the English language are “I’m from the government and I’m here to help.”

Lord knows I’m thankful that we have a government. But they’re about to “help” the real estate community in a way that is going to make closing on a house a lot more complicated for all of us.

On October 3, 2015, the new TILA-RESPA Integrated Disclosure rule (TRID), also called the “Know Before You Owe” rule, will go into effect for any real estate transaction involving a mortgage.  The rule consolidates four existing disclosure documents into two — a Loan Estimate (LE) and a Closing Document (CD). 

So far so good.

BUT . . . the Closing Document has to be delivered to the buyer three days before closing, so that he or she has adequate time to review it. Which all seems well and good. But it means that closing can’t happen until three days after underwriting has issued a “clear to close” and figures are finalized. Which means that buyers and sellers who would like to — or who need to — close sooner, can’t. Even if everyone is ready to go.

But wait — there’s more!  An increase in those figures will re-set the three day clock.  In other words, if a figure was wrong, or if an interest proration changes, or if any one of the moving parts in a real estate transaction ticks a fee upward, closing is automatically delayed until three days after the buyer receives the new Closing Document.  Mandatory. Regardless how very very well the buyer understands it, the Federal Government prohibits him from buying his new house before new three day waiting period is over.

The rule is intended to protect buyers from surprises at the closing table. Great. I am opposed to surprising buyers at the closing table. I personally don’t think it has to take three days for a buyer to absorb the shock of a corrected typo on a closing document, but then again I don’t make the rules.

But, thanks to the Law of Unintended Consequences, here are just a few of the land mines lurking in the new TILA-RESPA rule:

1. It will be even harder to compete against cash offers. Anybody who has attempted to buy a house lately knows it’s tough to compete with a cash buyer. Cash is simpler, free of the red tape of lenders and appraisers and underwriters.  And cash buyers can close quickly. Now, with an additional one to two weeks (at least) we’ll need to close a mortgage, buyers who need to borrow funds are at an even greater disadvantage when competing against cash offers.

2. Buyers’ ability to complete the transaction is at risk. So is their earnest money. The contract specifies a closing date.  And that buyers who violate the terms of the contract risk terminating the contract and forfeiting earnest money. When buyers don’t close on time, sellers can terminate the deal AND keep the earnest money. Picture this scenario: after going under contract, sellers receive a back-up offer for a higher purchase price. They’d rather sell to their back-up and get more money. But they are contractually obligated to the first buyers. But then, a figure change on the CD resets the three day clock. Now buyers can’t close on the date the contract specifies. They are in violation of the contract. Sellers can say “see ya!”, terminate the agreement and go to the second offer, leaving buyers homeless. And they can even keep the earnest money.

3. Sellers risk delays that put their own home purchases in jeopardy.  Most sellers can’t buy a new house until they sell the old one. So they usually time the closing on their new house within a few days — or even a few hours — of receiving the funds from their old house. But what happens when that closing is delayed? They don’t have the money to close on the new house. So that closing is delayed.  That the delay puts them in default, and puts their new house and their earnest money on the line.

4. Buyers risk losing their interest rate locks. Interest rates lock for a specific period of time. If the closing is scheduled near the end of that lock period, a three day delay could push closing past the lock’s expiration.  Which could drive the rate — and their monthly payments — higher. And else happens? The figures on the CD change.  Which triggers . . . you guessed it . . . another three day delay.

And on it goes . . .

They say you can’t fight City Hall.  But what you can do is to make sure that you have a real estate agent and a lender who are prepared to deal with these new regulations. It will matter at closing time, for sure.  It will also matter when you’re submitting your offer.  Sellers don’t want to risk these delays, so their listing agents will be looking closely for buyer’s agents and lenders who are local, professional, and who have good reputations in the real estate community.  

Of course it goes without saying that you have a fabulous real estate agent with a stellar reputation :) But your choice of lender becomes very important, too. If you know a truly fabulous loan officer, work with him or her. But if you don’t know anyone, don’t just wander into your local bank and sign on with the first person who smiles, or worse yet sign on with an internet lender located in God-knows-where. Find out who your agent recommends. We work with lenders every day. We know who gets the job done and who doesn’t.

The stakes are about to get a whole lot higher.

As always, call me if you have any questions about this, or anything. Or if you want to brainstorm about buying or selling or ice cream or anything.