Are mortgage borrowers well informed?

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Real Estate Services

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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Location:
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Tags:
mortgage
foreclosure
home loan
borrower
house
refinance
subprime

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Rainmaker
325,145
Esko Kiuru

George,

It's true about the closing officers.

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

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

July 08, 2008 04:15 PM
Rainmaker
325,145
Esko Kiuru

Gerard,

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

July 08, 2008 10:11 PM
Rainmaker
207,147
Richard Smith
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

July 08, 2008 10:14 PM
Rainmaker
325,145
Esko Kiuru

Richard,

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

July 10, 2008 06:00 PM
Anonymous
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Esko Kiuru

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