A big piece of the current mortgage mess can be traced to the fact that borrowers were hit with loan presentations that seemed too good to be true. Mortgage money was easy to obtain, and some lenders raced to sign up as many customers as they could and pocket the loan fees. They didn’t really care if the borrower could actually afford the loan they were signing.
The prevailing philosophy was that if a borrower – regardless of age, income or nationality – got behind on mortgage payments, home appreciation would bail them out and provide the cushion to refinance the loan. That is no longer the case.
One of the biggest groups hit by the attractive yet misleading loan programs were “last-time buyers.” These older consumers were not familiar with the terms or the plethora of loan programs available. These folks had no need, nor interest, in researching new loan terms and conditions because they had no intention of moving. But suddenly something happened, perhaps an accident or injury that required that they leave their family home and purchase a residence that better suited their new needs.
Another vulnerable group was first-time buyers, including many immigrants who were not able to understand the language let alone the real estate and mortgage jargon.
The bottom line is that many borrowers – in all groups – do not clearly understand loan documents and are afraid not to sign. Some have concerns about losing their loan lock, others don’t want to appear ignorant in front of a spouse or escrow professional, while still others simply want the process to be over and done.
There has never been a notation stating “if you don’t understand this, don’t sign” at the closing table nor have there been contact names and numbers provided if a borrower has questions. The escrow officer – an independent third party – can only do so much before referring specific questions to the lender or Realtor.
What if there was more support for not signing on closing day? What if there was no penalty – real, perceived or threatened – for waiting to sign the loan until the borrower truly understood loan adjustments, prepayment penalties and potential assumptions?
Three mortgage analysts, including Ed Pinto, a consultant to the mortgage-finance industry and former chief credit officer at Fannie Mae, have crafted a one-page mortgage information disclosure form that encourages borrowers to do more than simply look before they leap. An appendix supplies explanations to all loan terms and conditions. For example:
“You do/do not have a loan with possible ‘negative amortization.’ If you do, make sure you really understand what this means. Start with the definition on p. 3.”
In a clear, concise way, the one-page form asks borrowers if they understand the documents and requires them to approve their monthly income and other basic, yet critical, financial data at closing. At the bottom of the form it states “do not sign” until all the material is understood.
In a report on abusive lending, the federal government recommended that increased consumer education and disclosures about the lending process would cut down on abusive lending. Among other measures, the report also called for bans on harmful loan sales practices that do not consider the consumer’s ability to repay a loan; a ban on lump-sum credit life insurance; and, limits on points, prepayment penalties and fees that can be financed with a home loan.
All of that is well and good, but the average borrower does not really care about another loan caveat coming from Uncle Sam. Borrowers are overwhelmed with the loan process and the additional disclosures simply compound the anxiety and lengthen the time at the closing table. How about consolidating to one meaningful form?
For example, the closing officer for a refinance or new purchase loan will often say that “this is just another form that the government (or lender) makes you sign.” The borrower reluctantly signs it, hoping to get out of the room sooner by doing so.
Loan reps and escrow officers might say that a new one-page disclosure information form is not needed because much of the information already is included in the escrow packet. Nothing in the packet, however, states “do not sign this form if you do not understand it.” Hopefully, if that one form were a substitute for a stack of other forms, borrowers would pay more attention.