Last month HUD, the federal Housing and Urban Development agency, proposed an overhaul of the process for obtaining a mortgage. This overhaul would require mortgage brokers and lenders to supply borrowers with a “Good Faith Estimate” and more specific information about the mortgage or refinancing option they are applying for.

According to a HUD press release regarding the proposed overhaul, the new rules would make it easier for potential borrowers to comparison shop and find the least expensive mortgage available to them. It quoted HUD officials as saying that home buyers are not being properly informed about mortgage closing costs and terms.

The press release indicates that the proposed “Good Faith Estimate” included in the overhaul would oblige lending institutions to provide clear, specific details to borrowers on mortgage interest rates, rate adjustability, balloon payments, yield spread premiums, total closing costs, and pre-payment penalties.

The HUD overhaul would also mandate the reading of a “closing script” to mortgage borrowers by the settlement agent. The script would include major terms of the mortgage as well as any difference between the actual closing costs and those indicated in the “Good Faith Estimate”. This would help prevent borrowers from being confused or deceived.

A sample “closing script” supplied by the HUD web site appears to be straightforward and succinct. Other components of the overhaul include capping the amount fees can be adjusted after appearing in the estimate, and giving HUD the ability to penalize lenders or brokers who fail to comply with these new requirements.

HUD has also issued several example closing cost comparison forms, which would be used to indicate the difference between estimated and actual expenses. It appears that the following costs would be permitted to rise no more than ten percent after the estimate: credit reports, flood certifications, tax services, appraisals, mortgage ins., and title insurance.

If successfully enacted, the mortgage overhaul proposed by HUD appears likely to help home buyers more thoroughly understand the terms they are agreeing to, while preventing them from being charged excessive unexpected fees. However, the overhaul may face opposition from lenders and brokers who benefit from misrepresentations or unwarranted fees.

According to the Housing and Urban Development web site, responsibilities of HUD include the prevention of housing discrimination, reselling homes which have been foreclosed upon by the Federal Housing Administration, providing assistance to the homeless, and funding subsidized housing.