Tuesday, May 31, 2011

MORTGAGE & FINANCE: Revamped mortgage disclosures will help borrowers know what they really owe

The Consumer Financial Protection Bureau has begun testing two prototypes of mortgage disclosure forms that the new agency hopes will help borrowers applying for home loans.

So, why should this matter to you? “This is about empowering consumers,’’ said Elizabeth Warren, the Harvard law professor tapped by President Obama to set up the bureau. “Getting stuck with the wrong home loan can cost tens of thousands of dollars.’’

Did you understand the mortgage documents you signed when you bought your home? I’ve fielded questions from homeowners who have adjustable rate mortgages. Based on their questions, they only vaguely understood what an ARM was or even how their monthly payments could fluctuate.

The housing crisis that helped plunge the nation into a recession revealed a troubling thing about many borrowers. Many didn’t know how much they would owe. Many didn’t understand even the type of loan they were getting.

Instead, they were given exotic mortgages, and they didn’t fully comprehend that their low teaser interest rates would eventually reset, pushing their monthly payments beyond their affordability.

That’s not how it’s supposed to be. Current federal law requires that mortgage loan applicants receive two documents — the two-page Truth in Lending Act disclosure form and the three-page Real Estate Settlement Procedures Act Good Faith Estimate. Both forms are supposed to give borrowers fundamental loan information. It’s supposed to help them comparison shop and inform them of how much they will owe.

It took the recession and a wave of foreclosures before Congress acted to require simpler disclosure forms.

Last week, the agency announced the “Know Before You Owe’’ project to combine the two disclosure forms into a double-sided single document that should make the costs of a home loan clear.

The bureau is going to test the prototypes by conducting five rounds of evaluation. The testing will include versions in English and Spanish. Interviews will be conducted in six cities including Springfield, Mass. But the general public can also weigh in. It might help to first view how the current forms look. Go to www.consumerfinance.gov.

Once you’ve seen the old forms, go to the “Know Before You Owe’’ page.

Compared to the current forms, both prototypes are far better. I like the projected payments section, which spells out how a monthly mortgage payment could change over the years. However, in the section labeled “Adjustable Interest Rate Information,’’ terms such as “index’’ and “margin’’ are not explained. It’s vital that borrowers know what these terms mean because both affect monthly payments. If you don’t understand the terminology, go to www.investopedia.com.

What the bureau is doing is quite significant. Updating the disclosure forms could help prevent people from taking on debt they can’t afford.

Michelle Singletary Washington Post May 22, 2011

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