What is a GFE and why should I care?

o Recently on my blog I mentioned that I had a client who was "shopping" for the right loan. This client was well educated. He was a first time home buyer. He and his wife were trying to do what they thought was best for them in buying their first home. He did some research and came to me convinced he needed a 5/1 ARM. That would be an adjustable that has a fixed period for 5 years. In interviewing him and answering his questions (for over 3 hours), we determined that maybe this wasn't the best loan available to match their personal plan. I suggested some other options to look into besides the 5/1 ARM. We set another date on which to get together and go over these options.

o During that time he contacted another loan officer. This loan officer did not take the time to find out this couple life plan, to ask the important questions that needed to be asked. She simply gave them a quote for what he asked for. Typically these quotes are going to be in the form of what is called a GFE. That stands for Good Faith Estimate. It's a very official looking form. In certain cases is mandatory to provide a GFE within 3 days. Sounds like a good thing right?

o Then he came to me and asked for a quote so as to compare rates and fees. He wanted to do the right thing and compare loans and lenders. That sounds like a good thing too.

o This client went into this prepared to do his homework. Prepared to get the very best loan for him and his new family. A good faith estimate sounds like, and is even purported to be a good way to compare loans and fees. But here's where this all falls apart...

o Loan Officer's are sales people. They do not get paid if they don't do the loan. The more loans they bring in the more they get paid. While the GFE started out as a way to show borrowers what the details of the transaction are going to be, the sales people have found loopholes and have turned it and APR into a sales capturing tool. For them it's a hook.

o You see, the GFE doesn't have to be accurate. In fact, because of when it's produced in the loan process(at the beginning), it rarely is. While the law states that a broker or lender must produce a GFE, they cannot enforce its accuracy. There have been legislators who have tried to rectify this but as of right now, it simply does not need to be accurate. That opens the door for the less than ethical to produce something that thru the buyer's eyes is set in stone. Using the one loan mentioned, the 5/1 ARM as an example; If I wanted to produce the best GFE and trick the client into going for my loan I have many options available. Just in the loan itself I have close to 100 to choose from. What Index is this based off of? That makes a difference too.

o 1 Yr Treasury? 6 month? The LIBOR? Is it interest only? If so, for how long? Does it have a prepayment penalty? I might even pick a loan that they have no hope in qualifying for just because it looks good on the GFE. Or I can also pick a day on which rates where lowest and base the numbers off that day.

o Then there are the fees. As a broker we have a set fee. Every loan we do has those same set fees. That's the costs of doing business. But a GFE is so much more than just my fees. It also includes many other 3rd party fees. Title and escrow, the appraisal, recording fees and so on. Then there is the day of the month that you close on. Close at the end of the month and you'll have the fewest days of prepaid interest. Close on the beginning of the month and you'll have the most. Do you know at the time of the application when you will actually close? Of course not! I have seen GFE's from other loan officers that have 0 days of prepaid interest. They do that on purpose to minimize how the bottom line looks. It isn't real, and in effect they are flat out lying to their clients. The same goes for all the 3rd party fees. Since they are not my fees I can practically guess at what those fees might be. If I'm wrong nothing happens. Do you see where I'm going on this?

o Long story short, a loan officer can flat out lie on the GFE. The loan docs you end up signing in the end may have absolutely no resemblance to the original Good Faith Estimate. They will lie to you for one reason, to get your loan. There are a lot of bad people out there in all aspects of the real estate world, and there are a lot of good people as well.

o So what does the consumer do? How do you protect yourself? How do you compare? How do you shop? It's tough. There are so many hidden items stacked against you. So many things that you would never know. The best thing I can say is that still in this day and age, you have to trust your instincts. You have to use someone you trust. Someone who you have the confidence in. Someone who has your best interest at heart. A lot of people say they do. It's become a buzz word in the industry. But saying so doesn't mean they really do. Be careful out there. Use someone you know and trust.

Here's a PowerPoint version of a recent seminar we did on the topic. http://www.patagoniafinance.com/gfe.pps