Too much information.
That, in a nutshell, is what many home buyers face when they try to make pivotal decisions about which mortgage may or may not be the right one for them.
According to a soon-to-be-released study, the Federal Trade Commission says that while consumers clearly benefit from information, they suffer from "info overloadus" when bombarded with stuff they don't understand -- or don't care about.
As part of its follow-up to 2004 research into the effect disclosures on how brokers are paid have on borrow choice -- specifically how brokers are compensated by funding lenders in the form of yield spread premiums. The FTC said in a preliminary report last week that the disclosure of complex transactions, such as yield spread premiums, may confuse borrowers and lead to make a poor decision.
Yield spread premiums, also known as rebates, are back-end fees paid to brokers by funding lenders at closing. Typically, the premiums are paid when a broker brings the funding lender a loan at an interest rate that is higher than the lowest rate current available.
Usually, there are sound reasons for a borrower to pay a higher rate. Rather than paying out-of-pocket for an expensive set of closing costs, for example, they might be rolling the fees into the loan amount. But sometimes borrowers aren't told about the back-end charges, which they are actually paying in the form of higher-than-market mortgage rates.
The disclosure of YSPs has been a hot-button issue in the mortgage business for years. Indeed, it has been at the center of an often heated debate between mortgage brokers, the loan jockeys who originate 50 to 60 percent of all home loans, and mortgage bankers, the companies which actually provide the money.
Brokers are required to disclose the fees in closing documents. But all other loan originators, including funding lenders who operate their own origination shops staffed by loan officers who work directly for them, are not called upon to disclose the secondary marketing fees they earn when the sell loans to investors.
The National Association of Mortgage Brokers has adopted an all-or-none stance with regard to the issue. Either all originators, including those who work for lenders, must disclose all the fees they earn, NAMB says, or none should have to report anything anywhere along the lending process.
"If home buyers were provided with the same information from all originators, they would be empowered to make better financial decisions," says NAMB President Harry Dinham.
"While we believe it is essential to share as much information as possible with home buyers, most consumers suffer from information overload and are really only interested in the bottom line," the Texas broker says. "They want the same information disclosures from all originators that will allow them to compare apples-to-apples no matter where they shop for a mortgage."
The Mortgage Bankers Association, on the other hand, argues that there are good reasons why funding lenders should not, make that cannot, report secondary market fees. Often, the MBA says, loans are held for several months before they are sold, so it is impossible for them to know at closing what they will earn in the future.
NAMB has proposed a revised and simplified good faith estimate, which borrowers are supposed to receive within three days after applying for a loan, that focuses on four points of information: the loan amount, interest rate, monthly payment including insurance and tax, and the amount needed at closing. The association also is proposing new disclosures to help consumers avoid "payment shock" that can occur on adjustable rate mortgages.
The MBA also is calling for a simplified GFE, one that more closely resembles the HUD-1 settlement sheet borrowers receive at closing, so borrowers can more easily compare what they were told they would be charged and what they actually were being charged. And the MBA wants borrowers to receive a simplified, one-page information sheet at application that enumerates the pros and cons of the loan products they are considering.
As part of its research, the FTC has been field testing its own revamped version of both the good faith estimate and truth-in-lending forms required by the government, with dozens of borrowers who recently obtained home loans as the guinea pigs. And its findings could play a key role in the reform discussions that have been going on for what seems like eons to those of us who write about the business.
"We welcome the FTC's recommendation to consumer-test all forms since this is the only way to eliminate confusion when comparing loans and at closing," says NAMB's Dinham. "We urge HUD to respond quickly to the findings in the FTC's study when the final version is released."
Meanwhile, the Harvard Joint Center for Housing Studies has chimed in with its own recommendations. The Joint Center says that its examination of the root causes of consumer confusion in the mortgage market and the current rise in foreclosures point to the need to develop new forms of point-of-sale consumer assistance to enhance the ability of consumers to obtain manageable and fairly-priced loans.
These initiatives should include new telephone and on-line counseling services, where counselors are armed with the information needed to help consumers fight back against today's aggressive push-marketing activity. In addition, the research suggests actions that the mortgage industry could take to effectively sanction mortgage market participants who exploit those consumers unable to fend for themselves.
To ensure that all borrowers have access to the same set of consumers protections typically available in the prime market, the Joint Center's research suggests a series of actions that could promote greater regulatory uniformity.
Reforms for oversight of the primary mortgage market include: proposals to expand the reach of mortgage market regulations to include loans made by independent mortgage companies, legislation to extend existing Community Reinvestment Act oversight to cover all lending organizations, and legislation that directs federal regulatory agencies to assume responsibility for the licensing of all mortgage brokers and loan officers that directly interact with consumers in the mortgage lending process.