(This is Part 2 of a six-part series. Read Part 1, Part 3, Part 4, Part 5 and Part 6.) Bad mortgage selection has become a major problem with the explosion in the volume of complicated interest-only mortgages (IOs) and option ARMs (OAs). These instruments are often marketed deceptively to borrowers who don't understand them and are not prepared for the risks. The first article in this series considered one proposed solution: making lenders liable for the suitability of all mortgages including IOs and OAs. I concluded that this idea would not work mainly because the responsibility would have to be delegated to loan officers and mortgage brokers ("loan providers"). Loan providers mainly sell loans, which is inconsistent with responsibility for enforcing a suitability rule. A second approach to bad mortgage selection, advanced by federal regulators from five agencies, is to impose a new set of disclosure requirements on lenders. Instead of trying to amend existing requirements...
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