Push is on to make mortgages more simple

CHICAGO — Few borrowers read every line of the avalanche of paperwork that comes with a mortgage, and even the most well-intentioned consumers might have difficulty understanding all costs associated with their loan — and how it compares to what other lenders are offering.

Now, lawmakers and the Federal Reserve are looking to make the mortgage process easier to understand and fairer overall through regulations that could come to fruition via the proposed Consumer Financial Protection Agency.

The Federal Reserve on Thursday approved proposals designed to make it easier for Americans with mortgages, or shopping for them, to better understand how the loans work.

Among the changes, mortgage lenders would need to explain potentially risky features, such as prepayment penalties, of a mortgage in a one-page "plain-English" question-and-answer format before a consumer applies for a loan. Improved disclosure of the annual percentage rate, or APR, to capture most fees and settlement costs paid by the borrower also would be required.

Members of the public, lenders, industry groups and other interested parties have 120 days to comment on the proposals. Afterward they could be revised and will be subject to additional consideration by the Fed before a final version is voted on.

If the reforms materialize, "the days of fine print, amorphous language and an avalanche of papers ... that will come to an end," said John Taylor, president and CEO of the National Community Reinvestment Coalition, an association that promotes access to banking services to create affordable housing and job development. "Transparency is the name of the game."

After the Obama administration outlined the concepts late last month, Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, further discussed goals of the changes. According to Donovan, they include:

• Requiring transparency. Consumers would receive a simple, integrated federal mortgage disclosure that is "reasonable, clearly written and concise," and be adequately presented with the risks and benefits of a mortgage product.

• Promoting simplicity. Borrowers would first be offered "plain vanilla" mortgages with terms that are straightforward. They can obtain more complex mortgages, but those vanilla loans will be the first choice.

• Demanding fairness. Mortgage brokers would be required to determine whether the mortgage they're selling to a borrower is affordable, and prepayment penalties would be banned or restricted. Hidden fees that compensate a broker for selling a higher-cost loan would be banned.

Loan originators and the sponsors of securitizations could also be required to retain 5 percent of the credit risk of a mortgage, requiring them to have a stake in the outcome of the loan originated, Donovan said.

That point could possibly cost consumers more for their mortgage, perhaps adding as much as a half a percentage point to their mortgage rates, said Cameron Findlay, chief economist for LendingTree.com.

In addition, lenders who can't afford to make the procedural changes might be forced out of business, which could effectively decrease competition, he added.

"It's going to create a situation where banks and brokers alike are going to make sure that their costs are covered for any adjustment to their process," Findlay said.

But, Findlay said, any extra costs would be worth it to restore faith in the system and protection for consumers.

Even if lenders ultimately are forced to do fewer loans as a result of new regulation, the consumer protections are still worth it, said John Sullivan, president of the National Association of Exclusive Buyer Agents.

"I would rather people have more difficulty getting the loan than getting a loan they can't afford to pay in three years," he said.

At their heart, the changes intend to force clear disclosure in the mortgage market so that consumers can compare mortgage products on an apples-to-apples basis — with easy to discern costs so that lender-to-lender comparisons are more simplistic.

The goal is for people to pick a mortgage based on what is actually being offered, not how it is worded or what is presented — like they'd buy any consumer good, based on the product inside and not the packaging in which it's wrapped, Taylor said.

"Do you offer the best widget or don't you? It shouldn't be the best slogan or the best box," Taylor said.

But first of allthe Consumer Financial Protection Agency must be created. And some in the mortgage industry spy flaws in the proposals, and they'll fight to make their case.

"Traditionally, the lending world has been able to water down positive reform efforts on the regulation side so the result is not as good as it could have been," said Howard Banker, executive director for the Fair Mortgage Collaborative, a nonprofit organization that identifies and certifies lenders that adhere to standards of fairness.

If the proposals do, however, emerge from this process and go into effect, below are some changes a mortgage shopper might expect.

Less paperwork

Anyone who has gotten a mortgage knows just how much paperwork is involved. Forms today are "too many and too complicated" and could be clearer, said Marc Savitt, immediate past president of the National Association of Mortgage Brokers.

Alex Pollock, in testimony to the House Financial Services Committee last month, said the one good idea that has emerged has been the proposed requirement of clear and simple disclosures. Pollack is a resident fellow at the American Enterprise Institute for Public Policy Research.

"In congressional testimony in the spring of 2007, I proposed a one-page mortgage form so borrowers could easily focus on what they really need to know."

With better disclosures, borrowers can be better able to make sure they understand the debt commitments they are making.

Simple, basic

What would a "plain vanilla" mortgage be? Most likely a 30-year fixed-rate mortgage and possibly other basic loans, such as a five-year adjustable-rate mortgage, said Richard Thaler, a professor of economics and behavioral science at the University of Chicago Booth School of Business.

To obtain a mortgage with more complicated terms, "people would have to opt into them and be warned that they would be doing something unusual," he said of the more complex mortgage products.

Thaler is co-author of the book "Nudge," which examines scenarios that "steer people in the direction that is likely to be helpful and warn them about things that are likely to be dangerous." A "plain vanilla" mortgage encourages borrowers to opt for a certain basic mortgage type without banning other choices, he said.

This system could help prevent consumers from agreeing to complex terms they don't understand, when they might otherwise have chosen a simple, basic product.

Case in point: Sullivan, of the buyer-agent association, recently was involved in a transaction with sellers who didn't realize they had an interest-only loan until five years later when they wanted to sell the property; without paying principal on a loan, they didn't build equity.

Lower costs

Prepayment penalties, or costs you're charged if you want to pay a mortgage off early, could be banned or restricted by this proposed agency.

Consumers may not even notice another fee that could become extinct because they're not easy to spot to begin with: Yield spread premiums. Donovan, the head of HUD, called them "unfair practices," used by lenders to encourage brokers to sell riskier and higher-priced loans.

From the industry perspective, Savitt, of the mortgage-brokers group, said the premiums are a way consumers can finance origination costs over time.

He said that costs built into the interest rate should remain permissible, but that "it's important that everything be disclosed on both sides," meaning both brokers and lenders should disclose all fees embedded into the rate.

Information from

The Associated Press

is included in this report.