What the New Uniform Closing Instructions Mean to a Slumping Real Estate Market

Imagine that you've decided to reward yourself for your hard work and success, and purchase a Bentley Continental GT Speed. You walk into the showroom, perhaps take a test drive, haggle with the sales associateas much as one "haggles" for a Bentleyand within an hour or two, depending on your credit score and liquid assets, you drive away in your new car.

That's a purchase of nearly $200,000 that you made in one afternoon, with financing. According to RealestateABC.com the median home price in December 2007 was just slightly higher, at $207,500, and yet no one really expects that purchasewith a mortgageto take less than 30 days. Some home closings even take months.

That's what efficiency brings, and that's where the Uniform Closing Instructions (UCI) comes in.

What the UCI is and does

Kudos are due to the Mortgage Bankers Association of America (MBA), American Land Title Association (ALTA) and American Escrow Association (AEA) for their work on the Uniform Closing Instructions (UCI), which are expected to be ratified in the first quarter of 2008. This monumental piece of work offers tremendous protection for consumers from predatory practices and is long overdue.

The UCI comprise two parts: The general closing instructions (GCI) detail the requirements for all transactions; the specific instructions (SCI) will provide a standard format for the details of each transaction.

The current closing instructions that lenders use vary wildly from state to state, and even county to county, and so do settlement agent practices. This results in increased costs across every aspect of the closing process, costs which are then passed along to consumers, both in money and time. That is the impetus that set MBA, ALTA and AEA into action, to develop new standardized mortgage instructions.

The UCI will streamline the entire process, improving efficiency and lowering costs by replacing the endless myriad of paperwork (and cutting down on the massive amount of it, as well) by introducing standardized sets of just two document packs (the general closing instructions and specific closing instructions). This should help limit mortgage fraud and allow for automated (e.g., Internet-based) mortgage originations.

It's important to note that though the instructions will not be required to be used by lenders, the sponsoring groups believe the industry is crying out for such a solution. And given the current credit crisis, any help given to limit fraud and smooth the closing process will be universally lauded. There should be no doubt that the major, reputable lenders will be glad to use these instructions.

Positive impact

Streamlining and clarifying the closing process is a positive in and of itself. Using the instructions promise to increase efficiency, saving time and thus money, across the lending and settlement industries. This should ultimately reduce costs for borrowers, perhaps allowing them to feel better about the process.

One of the keys to success is the reasonable time requirement. The instructions require the lenders get the data to the closing agents 48 hours before the closing time. (Today's deadline is the closing table; that's when the lenders get their information.) This way, the borrowers will have time to look at the closing documents, ask questions, make comments, and make necessary changes. Thus, when you get to the closing table, the process should be very simple, as the parties involved should have already read the documents and taken care of any errors.

It will prevent delays in closings that cost the industry and the borrower money. With each duty and responsibility clearly articulated between the lenders, title companies and closing agents, no longer will items fall through the cracks, preventing a smooth closing. We've all seen closings not happen due to confusion or mistakes, which can cost a borrower his or her deposit, not to mention that continued faith in the process is necessary for home sales to move in the right direction.

This leads us to the most important outcome of the expected near-universal adoption of the UCI: limiting fraud. The settlement agent is directly charged with detecting and deterring mortgage fraud, which directly contributed to the current crisis the real estate market is embroiled in, as settlement agents are the gatekeepers of the transaction. The more cognizant they are of their role in combating fraud, the better the chances of preventing straw loans. The documents even control the amount a mortgage broker is permitted to be involved in the closing process.

Finally, the UCI will pave the way for "automated mortgage originations" or eMortgages, as the MBA has termed them. With a standardized set of instructions, a potential borrower could complete the process online, even submitting PDFs of the necessary documents (such as pay stubs, etc.). This will help move the industry into the new century and allow for even greater ease of closing.

The bad news

On the down side, the most significant impact of the UCI is its restriction on legitimate flip sales. The UCI will curtail the buying and selling of property due to financially-distressed circumstances, as it doesn't permit a reduced purchase with an immediate turnaround to a sale at retail prices.

While this is an attempt to help stem fraud, many flip sales are responsible, legitimate transactions done by aboveboard investors. Thus the UCI will slow the real estate market recovery, as investors often help drive the market when no one else is buying.

With the real estate inventory as high as it is and lenders as skittish as they are, any barrier to home sales prevents a turnaround and will only serve to deepen the problem. In this case, the authoring agencies are cutting their nose off to spite their face.

The bottom line

Obviously, the good overwhelmingly outweighs the bad. And while the instructions in their current state are not perfect, they are a great start. In the long run it will help every person involved in the closing transaction and create a better and safer buying and selling climate.

A uniform set of instructions that is widely adopted by the industry will allow skilled agents to conduct the closing process quickly and accurately, will strengthen compliance and anti-fraud tactics, and will reduce the costs of completing a transaction. Adoption of the UCI will ultimately prove profitable to everyone involved.