At first look, the foreclosure epidemic that is currently roiling the home loan industry is clearly pointing in the direction that a good portion of buyers are relatively unconcerned about the mortgage program they signed for and that's why they are now in distress. The number of foreclosures, however, is only affecting about 4% of all mortgages outstanding, a very manageable percentage. Historically it's high, but in the big picture today it can still be considered minor.
It means then that most borrowers do actually understand relatively well what they are committing to. No one needs to be an expert in the finer details of a mortgage, but the basics seem to be clear. Not so fast, though. Enter the Federal Trade Commission and the study it conducted in 2007 on the issue and the results unfortunately prove otherwise.
- For instance, 20% of mortgage applicants were unable to pinpoint the interest rate on the mandatory disclosure forms.
- A surprisingly high 44% failed to ascertain whether there was a prepayment penalty if refinanced within two years.
- And 30% couldn't figure out if the loan program had a balloon payment or not.
- 24% couldn't pick out the less expensive loan when comparing side-by-side two different products.
If anyone wondered, prime applicants did only marginally better than subprime borrowers on this study.
These alarming numbers have surely generated anxiety and heated debate among politicians and regulators as to what to do. Washington has been buzzing with activity for months on new mortgage industry regulations and as expected some ideas they have come up with make more sense than others. How much can they do, though?
Mortgage instruments have admittedly grown very sophisticated over the years which has made them harder for the borrower to understand. That's the downside of the progress in the field. The upside is that more people have been able to buy a house with the new, creative programs. The bottom line seems to be that the consumer has little choice but to educate himself on them or risk being left off the train. He has to take more responsibility for his own financial decisions, in other words.
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Provided by:
Esko Kiuru
Mortgage Consultant, Father, Golfer, Skier, Beer Aficionado
www.eskokiuru.com - complete mortgage platform
www.BluefoxToday.com - syndicated mortgage and real estate blog
esko@eskokiuru.com
My cell: 702-499-1006
Home loans in Southern Nevada - including Las Vegas, Summerlin, Henderson, Green Valley, Mountains Edge, North Las Vegas, Southern Highlands, Anthem, Boulder City, Pahrump and Mesquite - and all of Nevada.
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How well informed are people in any aspect of personal finance? I bet similar studies would show that most consumers have no idea how much interest accrues on credit cards and how much paying the minimum payment really costs in the long term. I'd also bet very few people actually have any idea of how their 401(k) or retirement plan works.
The problem with educating consumers regarding mortgages is that buying a home tends to be a very emotional decision. People tend to overlook certain aspects of the loan such as prepayment penalties because they so badly want to buy that house or refinance that loan. The same can be said for adjustable rate mortgages. Consumers took these products because it was the only way they could afford the loan with the attitude that they'd worry about what to do when the payments increased when it actually happened. We can blame dishonest mortgage professionals who didn't disclose this all the terms of a particular product (even though it was spelled out on the paperwork) but I would bet that even if you made borrowers read books, watch videos, and attend classroom training on the dangers of interest only, ARM's etc, at the end of the day the majority would still sign on the dotted line.