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Front-loaded loans: bad for borrowers?

By Jack Guttentag, Monday, November 23, 2009.

Flickr photo by <a href="http://www.flickr.com/photos/mcquinn/2450109943/">MC Quinn</a>.

It is often said that the interest on home mortgages is "front-end loaded," implying that the way lenders charge interest is both unfair and self-serving -- possibly even sinister. The following statement is typical.

"Did you know that on your typical 30-year mortgage, it takes approximately 21 years just to pay down less than half of the principal of your loan?

The mortgage industry's big secret has been kept away from the public since the Roosevelt administration. more...

Debunking refinance myths

By Jack Guttentag, Monday, November 16, 2009.

Many mortgage borrowers have interest rates well above those available in today's market, but can't refinance profitably. One common reason is that their property values have declined to the point where a new loan would require mortgage insurance. A second reason is that they are self-employed and cannot meet the tough income-documentation requirements that now prevail. Still a third reason is that the borrower's credit score has either deteriorated or no longer meets the higher scores that are now required.

These borrowers face real problems for which there are no easy remedies. more...

Dos and don'ts of mortgage shopping

By Jack Guttentag, Monday, November 9, 2009.

Flickr photo by <a href="http://www.flickr.com/photos/jkarpala/3430391074/" target=blank>Jeff Karpala</a>.

"I don't want an education in mortgages; I just want to know enough to save as much money as possible on my new mortgage. Also, as an African-American, I want to avoid being taken advantage of. Any chance you can distill what I need to know into one article?"

Here are some quick and dirty suggestions for vulnerable borrowers who want to save money but don't want to make the process into a life's work.

Determine Your Status as a Borrower Before You Search For a Loan: You may not qualify, which is a common occurrence in a market that has become very demanding in the wake of the financial crisis. more...

Mortgage shopper's dream come true

By Jack Guttentag, Monday, November 2, 2009.

As noted last week, borrowers often make costly transactional mistakes because they know less than the loan providers they deal with, who are motivated to exploit their information advantage. A borrower who pays 5 percent when she could have gotten 4.875 percent if she had known what her loan provider knew has made a transactional mistake.

Borrowers make lifestyle mistakes for the same reason, and also because lifestyle decisions are often complicated, and borrowers tend to overweight short-term benefits and underweight long-term costs. A borrower who refinances to reduce her payment at the cost of owing substantially more after five years may have made a very costly lifestyle mistake. more...

Avoiding costly mortgage mistakes

By Jack Guttentag, Monday, October 26, 2009.

Flickr image by <a href="http://www.flickr.com/photos/oddsock/2640764495/" target=blank>oddsock</a>.

Shortly after starting my Web site, I decided to add a feature on some of the common mistakes borrowers make, and how to avoid them. Today, there are about 100 mistakes on the list, and it continues to grow.

Recently, I decided to take another look at this list as I pondered a different question: Why do mortgage borrowers make so many mistakes, and are there changes in the system that would reduce them? more...

Savvy borrowers know their PNPs

By Jack Guttentag, Monday, October 19, 2009.

Flickr image by <a href="http://www.flickr.com/photos/29278394@N00/3934435595/">normanack</a>.

PNP, which stands for "pricing notch point," is a value of one of the factors used in pricing goods at which the price changes. In most lines of business, the factor used to price is the quantity purchased. For example, at the farm stand where I buy corn, the price is 70 cents an ear for the first three ears, 65 cents for the next three, and 60 cents for any ears beyond six. This merchant's PNPs are three ears and six ears. These PNPs are pretty easy for consumers to understand, but the stakes are small.

In the mortgage market, PNPs are more complicated but the stakes are high. On a mortgage, the "price" includes the interest rate, mortgage insurance premium and points, any or all of which can change in response to changes in loan size, loan-to-value ratio (LTV) and credit score. Each of these has its own PNPs. more...

Why fewer Danes default on loans

By Jack Guttentag, Monday, October 12, 2009.

My first column in this series pointed out that the Danish housing finance system, which is tightly regulated but completely private, has emerged from the financial crisis barely scratched. The Danish mortgage bond market where all new mortgage loans are funded has continued to function normally. In contrast, the private secondary market in the U.S. has shut down, leaving the system almost entirely dependent on the federally controlled secondary market agencies: Fannie Mae, Freddie Mac and Ginnie Mae.

The mortgage crisis that erupted in 2007 had its genesis in the prior bubble period, when home prices were rising rapidly. Price increases reduce the perceived riskiness of mortgages, encourage investors to accept mortgages that in a stable environment would be viewed as unacceptably risky, and induce lenders to increase loan volume by liberalizing their underwriting requirements. more...

A model mortgage market

By Jack Guttentag, Monday, October 5, 2009.

Denmark's flag. Photo courtesy <a href="http://en.wikipedia.org/wiki/File:Dannebrog.jpg">Per Palmkvist Knudsen</a>.

In 2002 I wrote a column contrasting the housing finance systems of Denmark and the United States. Recently, both systems have been stressed by the worldwide financial crisis, prompting me to take another look. I was interested in whether the impact of the crisis on the two systems revealed anything further about their relative strengths and weaknesses?

The core of the Danish system is eight specialized mortgage banks that originate all home mortgages, and a mortgage bond market where the loans are funded. There are bonds with fixed and adjustable rates, and within each category there are separate bonds for different terms. more...

Loan shoppers: their own worst enemy?

By Jack Guttentag, Monday, September 28, 2009.

Flickr image by <a href="http://www.flickr.com/photos/lentini/3172635578/sizes/o/" target=blank>Lentini</a>.

For many years, the Federal Reserve and other federal agencies with responsibility for formulating required disclosures of financial information were tone deaf. They decided on the information borrowers should have without ever asking borrowers what they wanted, and without testing to see whether the information the agencies had selected for them was useful or even understood. For this they were much criticized, and rightly so.

But this has changed. In recent years, the Federal Reserve in particular has gotten religion, and their latest proposals to reform the Truth in Lending Act are replete with references to the results of consumer testing. Many of the Fed's proposals are the direct result of listening to consumers. more...

Mortgage reform targets excessive costs

By Jack Guttentag, Monday, September 21, 2009.

Of all the issues that have bedeviled regulators and legislators dealing with consumer protection, perhaps the most troublesome have been abuses connected to mortgage loan originator compensation. Most reform proposals have been directed at abuses by mortgage brokers, and don't apply to loan-officer employees of lenders. And many of the less thoughtful proposals for curbing broker abuses would eliminate the borrower's option to have the lender pay the broker's fee in exchange for a higher rate.

I am pleased to report that the recent proposals of the Federal Reserve to amend the Truth in Lending Act (TILA) deal with abuses by loan officers as well as brokers. more...

New tool simplifies mortgage shopping

By Jack Guttentag, Monday, September 14, 2009.

As indicated last week, the annual percentage rate (APR) that the law requires mortgage lenders to disclose alongside the interest rate is not a useful measure of cost to the borrower. Expressed as a percent, it makes no intuitive sense to most borrowers, does not yet cover all costs, and does not take account of differences in borrower time horizons, tax rates and opportunity costs. A much more useful measure is the "time horizon cost" (THC) that is described below.

The THC is the total cost of the mortgage in dollars over the period the borrower expects to be in the house. I will illustrate it with the example I used last week of a borrower choosing between a fixed-rate mortgage (FRM) at 5.125 percent and zero points, and another at 4.25 percent and 4.4 points. more...

APR not best gauge of mortgage costs

By Jack Guttentag, Friday, September 4, 2009.

Consumers shopping for a mortgage are frequently confronted with having to make a choice between complex alternatives. For example, they can select a fixed-rate mortgage (FRM) on which the rate is fixed at 5 percent for 30 years, or an adjustable-rate mortgage (ARM) on which the rate of 4.375 percent holds only for five years, after which it changes with the market.

On both loans, furthermore, a lower rate is available if the borrower pays points, an upfront charge expressed as a percent of the loan amount. In addition, borrowers have to pay a variety of fixed-dollar fees to lenders, and other fees to third parties, such as title agents and appraisers. more...

Lender policy key to mortgage shopping

By Jack Guttentag, Monday, August 31, 2009.

Among the more interesting of the Federal Reserve proposals for amending the Truth in Lending Act (TILA) is one to expand the disclosures required at application. The purpose is to encourage mortgage borrowers to shop before they commit themselves.

The major new disclosure is one called "Key Questions to Ask About Your Mortgage." The heading atop the list of key questions states, "The only way to make sure you get the best possible loan terms is to talk to several lenders: Shop, Compare, Negotiate." more...

Fed flunks consumer protection

By Jack Guttentag, Monday, August 24, 2009.

Flickr photo by <a href="http://www.flickr.com/photos/phobia/2308371224/" target=blank>hans.gerwitz</a>.

The Federal Reserve Board has finally released its proposals for reforming the Truth in Lending Act (TILA). It comes right in the middle of a debate over whether a single consumer protection agency should be created to take over all consumer protection functions, including the administration of TILA.

Since the Fed has already indicated its strong opposition to the single-agency idea, it is tempting to view the TILA proposals as an attempt to protect its turf by polishing its consumer protection credentials. But that would be wrong, because the single-agency idea surfaced only this year, whereas the board's TILA proposals have been in the works since 2004. more...

Many refis offer right of rescission

By Jack Guttentag, Monday, August 17, 2009.

Borrowers who refinance loans on their primary residences with lenders other than their current lender have a "right of rescission." They can cancel the deal at no cost to themselves within three days of closing. Following a rescission, the closed loan ceases to exist.

What Is the Purpose? The right of rescission is designed to protect borrowers who have been deceptively sweet-talked into a transaction that is not in their financial interest. It gives them an opportunity to think it over, solicit advice from others, and back out, while recovering any monies they have paid out. more...

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