Borrowers deserve a break

The mortgage-shopping process is broken.

Despite well-intended government efforts to simplify comparison shopping for a home loan and all the required services that come with it, the process still doesn't work -- at least not for the homebuyers it was expected to help.

Lenders and brokers have already found a way to circumvent the intent of the new and binding good-faith estimate of closing costs associated with a mortgage by switching to nonobligatory worksheets that only approximate what borrowers can expect to pay at the settlement table.

Now lenders are backing away from offering the preapproval letters that many real-estate agents demand to see before putting people in their cars to be certain they are showing would-be buyers houses that fit their price range.

But the loan costs don't matter if a would-be buyer can't secure a loan. Nor does it matter how large a loan the lender says that buyer qualifies for if the preapproval is so riddled with holes and contingencies that it is all but worthless.

No, buyers need to know first that they are approved for a mortgage. Then, armed with that approval, they can shop for a house and the attendant settlement services. Consequently, they need direct access to the automated underwriting platforms operated by Fannie Mae and Freddie Mac, the two government-chartered secondary-mortgage-market enterprises that keep money flowing to housing.

In their heyday, the high-flying GSEs ruled the mortgage roost. Although Fannie May and Freddie Mac didn't make loans directly to consumers, practically every lender and loan broker used -- for a fee -- their electronic approval systems to decide whether to make a loan or not.

To protect their lender "customers" and their all-important bottom lines, the two companies refused to allow borrowers direct access to their underwriting programs. They would advertise themselves, not just in trade publications but also in the popular press, as providers of mortgages to the masses. But to get into their systems and actually be approved for a home loan, each borrower had to have what amounted to a lender or broker sponsor.

Because of accounting shenanigans and ill-conceived missteps into risky subprime and exotic mortgages, Fannie and Freddie have fallen far from grace and are now operating under the aegis of their regulator, the Federal Housing Finance Agency.

But because of the mortgage-market meltdown and the almost complete withdrawal of investors worldwide from mortgage-backed securities, the companies, along with the Federal Housing Administration, are even more crucial now than they were when the mortgage market was operating on all cylinders.

Indeed, practically 90 percent of all mortgages today are either insured by the FHA or purchased by Fannie Mae or Freddie Mac. As a result, Fannie's Desktop Underwriter (which is used by the FHA) and Freddie's Loan Prospector are more dominant than ever.

So what better opportunity is there to do something good for the homebuying public and turn the process on its head?

Allow consumers to push the button on their mortgage applications, gain approval for the loans they seek on the houses they want to buy, and then shop that approval to lenders. "Here's my acceptance letter, my proof that my loan is admissible to the secondary-market institution that will buy it," they can say. "So what's your price and what are your closing costs?"

In that way, borrowers can truly shop exactly what it will cost for their loan. They will know the lender's total pricing, interest rate and all, not some time down the road but up front so they can make the decision not only to proceed but which lender to proceed with.

Last year, Fannie Mae agreed to a small pilot program that would have allowed borrowers indirect access to its underwriting engine though its "trusted adviser" portals. However, it never got off the ground.

It's time to resurrect the idea and take it even further by allowing borrowers to determine firsthand -- and at no cost -- whether their loans are salable to either of the all-important secondary-market entities. The technology is already in place. Consumers already have direct access to the Nationwide Mortgage Licensing System, the state-run clearinghouse that holds licensing, employment and disciplinary information about the originators with whom they are dealing. Let borrowers pull the trigger on their mortgage applications instead of forcing them to line up with some go-between who finagles with the pricing every step of the way.

Lew Sichelman has been covering real estate for more than 30 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance-industry publications.