An article in the Sunday New York Times talks about an Obama Administration move to make mortgages more intelligible to the common person. I like the idea, but I think the approach is somewhat off base.
The idea, basically, is that when mortgages were all pretty much the same -- thirty years, standard rates -- it was easy to make intelligent financial decisions. Once they became more complex, with teaser rates, balloon payments, and all of the gimcrackery that the financial industry could think up to push the product, it became a lot harder. People got into financial trouble -- sometimes because they didn't understand what they were getting into, and the potential liability; sometimes because they did understand, and the loan went sour on them as their personal economic position went south.
The proposed solution is to let mortgage issuers do as they have been doing, but require them to also offer old-style mortgages. The thought is that new consumers, or consumers who are not certain that their economic situation will always be sufficient to meet their debt, would be steered toward the old-style offerings. Experienced or flush consumers could choose as they wish. Well, both types could, but the first would be encouraged to 'go simple'; the other type would be on their own.
I see two problems with that approach. First, I assume that mortgage issuers can make more money pushing the complex and esoteric mortgages, so that's what they'd continue to do. If they were legally required to offer the vanilla ones, they would -- but they'd be at the back of the glossy prospectus, with wording that made them sound strange, dull, if you're not very bright, perhaps this type would be more to your liking. And second, you can't stop people from making dumb choices. You're over 21, you're on your own. Just because the simpler mortgage offering is there doesn't mean you won't pick the complex one. What you're getting is a better range of choices, but what you don't have is a better ability to make the choice. You can't do the math. No shame to you in that -- some of the offerings are written in a way that make it very tough to do. So you follow what the brightly printed brochure suggests, which leads you to the complex, money-making offerings. Good luck.
I'm not saying that they ought not to be required to make that offering -- I think they should, just as I think that cellular phone companies ought to be required to offer a simple, straightforward plan with no hidden oh, didn't we mention that charges or methods. But they also need to offer a way to make that analysis comprehensible to the average person. A way for the non-math-freak to get a good gut feeling (or better) for what they're choosing, the benefits, and the risks.
I won't hold my breath.
2 comments:
I just did a quick Google search, and the thing that struck me was how often I read "exotic mortgages are much more difficult to calculate".
That's where the effort at disclosure should be - in neat, orderly statements of what you're actually getting yourself into. That and some tighter regulation!
I remember we went for a home equity loan and the only type we could find was exotic - not because we had poor credit (we had excellent credit), but because that was the only thing the companies would offer us! That loan was then sold to some other entity, and the original loaner no longer cared. As a result, they could push you into bigger loans, the type that looked good on paper, and cost a fortune to maintain. I sat at the table saying "we're not doing this - I can't figure out the basic payment! It could be anything!" We didn't do it.
That's the basic problem - there's no accountability built into the system. Sure, exotic financial instruments should exist - but the terms should be clearly defined, clearly stated and easily compared.
You should read "Busted" by Edmund Andrews; I'll do a review of it, this morning. It's a fascinating look into how, because of exotic mortgages and their bundling, the financial world went "somewhat" askew...
Carolyn Ann
The older I get, the more I have to fight the tendency to assume that people (organizations, really) do things because they care more about themselves than they do about their customers. Its not that I think that's wrong -- I do believe that -- so much as that acting with that as my primary insight into why they act as they do blinds me to the idea that they might have other motivations, too.
I'll look for that book.
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