Mortgages Are Too Complex

Mortgage loans need to be made more simple and straightforward. However, in an effort to be competitive, mortgage lenders tend to load the consumer up with a lot of features. The end result is information overload for the borrower. It makes it harder to compare one mortgage offering to another. It means that borrowers can be manipulated more easily. It also means that borrowers do not really understand the consequences of some of the decisions that they make, just as they sit down to sign for the biggest loan they will ever have.

Perhaps I'm a bit old. I did notice some ominous creaking from strategic joints just recently, but it seems to me that we should be able to actually understand our mortgages.

In an article from Realty Times, a soon-to-be-released Federal Trade Commission study indicates that while borrowers need to get the right information, they become immobilized and confused when overloaded with stuff they don't understand or don't care about. Mortgage closing costs are a minefield of items that can add up to thousands. However, the report specifically talks about yield spread premiums, which are the commission paid to loan brokers. Of course, brokers are required to disclose what they are paid; that was instituted to protect borrowers. You'll usually pay a yield spread premium when you are paying a higher interest rate than the lowest available. 

Okay. So you should know that you are paying more interest than you could pay. However, there could be very good reasons to do that. For instance, you could be rolling all your closing costs into the mortgage in exchange for a slightly higher rate. Howeer, not everyone you get a loan from is actually disclosing those fees! Mortgage brokers are required to; if the person you are dealing with works directly for the lender that will write your loan, you could be paying such fees and never know it.

The National Association of Mortgage Brokers says that everyone should have to disclose yield premium fees. This appears to make good sense. However, the National Association of Mortgage Brokers proposes an alternative plan; it says there should be a simpler Good Faith Estimate (GFE). Three days after applying for a loan, the consumer should get a GFE that provides four points of information: the loan amount, interest rate, monthly payment including insurance and tax, and the amount needed at closing. The proposal also includes new disclosures to help consumers avoid a painful payment surprise that can occur on adjustable rate mortgages (ARMs).

This is all well and good, but what happened to a decent rate on a specific loan amount with a clearly defined payment frequency? "Closing costs" never used to include the wide variety of charges that are now thrown at consumers. In fact, I'm sure that my parents bought houses without having to increase their mortgage by thousands, just to cover closing costs.

Oh, oh. Showing my age again.

I would love to see some new lenders come into the market, who explain what is going on in plain English, and who treat the term "good faith" as if it meant something.

Michael Chantrel 

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