Are mortgage borrowers well informed?

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Services for Real Estate Pros

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, real estate and apartment industry analyst 

www.BluefoxToday.com - syndicated mortgage, housing and property management blog

eskokiuru@gmail.com
My cell: 702-499-1006

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Rainer
38,759
Michelle Chamberlain
Above All Financial Services -Pennsylvania Mortgage Broker - Secane, PA
Suburban Philadelphia Mortgage Broker

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.

Jul 05, 2008 10:12 PM #1
Anonymous
Anonymous
Anonymous

Esko, It is an interesting study.  I would have to know more about the study though.  Where was the target audiance, their incomes, their education, etc.  I know that most of my high end clients are well versed in the terms of their loan.  I would say with 1st time home buyers, even if you went over all the terms 5 times will still be overwhelmed when getting their 1st mortgage. aj

Jul 05, 2008 10:40 PM #2
Rainmaker
251,689
Robert Machado
HomePointe Property Management, CRMC - Sacramento, CA
CPM MPM - Property Manager and Property Management - Sacramento Area

Loan broker should be working for the benefit of the public they serve and  not just the commissions.  That would be the way to conduct any business.

Jul 06, 2008 12:32 AM #3
Rainer
38,759
Michelle Chamberlain
Above All Financial Services -Pennsylvania Mortgage Broker - Secane, PA
Suburban Philadelphia Mortgage Broker

Who said that loan brokers were working just for commissions?  Can't we say the same for real estate agents as well?   My point is that even when you try to discourage people from taking non-traditional mortgage products (without which they would not be able to qualify for a mortgage) most people would not listen anyway as they are too emotionally involved in making the purchase, have already fell in love with their dream home, etc.

Jul 06, 2008 01:15 AM #4
Ambassador
1,882,427
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages Connecticut - Middletown, CT
Your Connecticut Mortgage Expert

Esko it seems to me that those who are doing the Closings are not doing a very good job of explaining the documents either.

On another note even though only 4% of all outstanding mortgages are in foreclosure, that number is higher than I would have expected.

Jul 06, 2008 08:34 PM #5
Rainmaker
325,145
Esko Kiuru
Bethesda, MD

Michelle,

Well put.

Jul 08, 2008 12:21 PM #6
Rainmaker
325,145
Esko Kiuru
Bethesda, MD

Alan,

Educating the borrower is a long-term process.

Jul 08, 2008 12:22 PM #7
Rainmaker
325,145
Esko Kiuru
Bethesda, MD

Robert,

There are mortgage brokers who should spend more time with their clients.

Jul 08, 2008 12:23 PM #8
Rainmaker
325,145
Esko Kiuru
Bethesda, MD

Michelle,

Sometimes customers do go their own way and against the loan originator's advice.

Jul 08, 2008 12:25 PM #9
Rainmaker
325,145
Esko Kiuru
Bethesda, MD

George,

It's true about the closing officers.

Jul 08, 2008 12:32 PM #10
Rainmaker
41,308
Gerard Maher
Coldwell Banker Alfons Realty - Ocean Springs, MS
CRS Ocean Springs, MS

Well my 2 cents is that we layer so much protective clauses in all our contracts, that when you get to closing and have about a ream of paper to sign, or initial, is it any wonder, that people start to tune out the reading and just go into a signing mode?  We want to protect people from things by making regualtion, but then we keep adding regulations, until they get buried on top of one another, and the consumer just want to get it over.  Only about 5% of all buyers I deal with, want to hear details.

G

Jul 08, 2008 04:15 PM #11
Rainmaker
325,145
Esko Kiuru
Bethesda, MD

Gerard,

Mortgage paperwork at closing is a lot of stuff to digest, no question.

Jul 08, 2008 10:11 PM #12
Rainmaker
207,718
Richard Smith
Chattanooga, TN
FHA VA Rural Development in TN GA

Esko,

It is funny that I had recently written how many clients were coming so well informed. Are we speaking about the same people?

The disclosures are certainly there. I wonder if the people had forgotten details or did not know this information at the time of closing?

Could you give the link to a summary of the report?

I get asked rate? points? prepayment? on a good percentage of my applications.

Richard

Jul 08, 2008 10:14 PM #13
Rainmaker
325,145
Esko Kiuru
Bethesda, MD

Richard,

That's what FTC found out on their study. Check the FTC website for more info.

Jul 10, 2008 06:00 PM #14
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