Mortgage mess? Look to fine print

THE SAVAGE TRUTH | Amendment would outline loan to borrowers

Don't ask, don't tell. That was the unspoken motto of the mortgage mess that has now escalated out of control. Home buyers didn't ask questions because they wanted the house or the home-equity loan. And mortgage brokers didn't tell the applicants about the consequences of the papers they were signing because each loan paid them a fat fee.

The details of those mortgages were in the fine print of huge stacks of documents. And no one reads the fine print! The rest is history now, revealed in the statistics that roil the financial markets and in the sad stories of people losing their homes.

Now a simple solution is being offered in Congress, offering hope that the next generation of homeowners might be spared this particular financial disaster. It's part of a proposed amendment to the Truth in Lending Act.

H.R. 3012, "The Fair Mortgage Practices Act of 2007," would create a national system for registering mortgage loan originators. And a key feature of the bill is that a "one-page disclosure form be required for all consumer credit plans secured by the consumer's principal dwelling."

The creator of this idea is Alex J. Pollock of the American Enterprise Institute and former CEO of the Federal Home Loan Bank of Chicago. Pollock suggests that instead of imposing new and costly regulations on lenders, it would be far more practical to create a simple disclosure document that could be easily understood.

Find it at: www.aei.org/doc Lib/20070515_PollockPrototype. pdf.

Says Pollock: "The key is to realize that complex, lengthy statements in legalese and regulatoryese do not achieve the goal."

Amen.

The proposed one-page form would be given to every borrower three days before closing. The "fill in the blanks" approach is simple. Lenders would clearly disclose the amount of the loan, the appraised value of the property and the percentage of the appraised value of the property being borrowed.

The form clearly spells out the number of years on the loan and the final maturity date. A separate section explains the interest rate -- the initial rate, and how long the loan will stay at that rate, as well as how high the rate and payments could go, and when. There's a separate line that highlights the maximum possible monthly rate and payment.

Another key section explains that the loan is based on the borrower's monthly income -- and that income figure is clearly highlighted. (Many brokers fudged the income figure to qualify borrowers, without the borrowers' knowledge, so the broker could make the loan work, and get the fee.) And there are separate lines showing what percentage of the borrower's income would be consumed by mortgage payments if rates move higher.

Another section details "factors to beware of" - including prepayment penalties, balloon payments, points, fees and closing costs. In fact, the actual form is simpler to read and understand than even this brief description!

It concludes with a bold-faced warning: Do not sign this if you don't understand it!

Certainly if borrowers had been exposed to this form, they would have understood the consequences of low initial "teaser" rates and payments. Equally certainly, if lenders had been required to collect, document and file these signed forms, there would be far fewer borrowers in over their heads today.

It's not typical of Congress to create something simple to protect their constituents. The idea of the one-page income tax form is compelling only to those outside the political sphere. After all, if you simply had three lines -- My Income, My Tax Rate and Amount Owed -- then Congress would have no power to dole out deductions and credits to their favored contributors!

But the idea of a simple one-page mortgage disclosure form should pass without opposition. And that's The Savage Truth!

Terry Savage is a registered investment adviser. Check out Terry's answers to reader questions at suntimes.com, and click on Business. Distributed by Creators Syndicate.