Letter to the Editor: Clear and Simple Mortgage Disclosure

To the Editor:

Your article "Agreement on Respa Problem, Not Solution" [June 23] begins by saying that "many bankers have acknowledged that confusing mortgage disclosures contributed to the housing crisis." In fact, virtually everybody — bankers and borrowers, members of Congress, regulators, and commentators, anyone who has ever gotten a mortgage loan — agrees that lengthy, small-type, convoluted mortgage "disclosures," which confuse instead of clarifying, are a notable failure of the American housing finance system.

This is in spite of the good intentions of the regulations requiring them. The inability of large percentages of people to correctly interpret current mortgage disclosure forms was unambiguously demonstrated by a 2007 FTC study, although we all knew it already.

Your article also begins by saying that "the financial services industry is fighting the government's latest effort to update" the forms. Yes — because the new proposal is not yet simple, straightforward, and clear enough. HUD, in a good-faith effort, is proposing a new four-page disclosure form. But what is needed is a one-page form, sharply focused on the essential commitments the borrower is making. It should look something like the one-page form I have proposed, "The Basic Facts About Your Mortgage Loan" (available at www.aei.org as "Alex J. Pollock's One-Page Mortgage Form").

A meaningful and effective disclosure must highlight the borrower's income on which the loan is based. Next must be the estimated total mortgage payment, including interest, principal, property taxes, and house insurance — and for adjustable-rate loans, what this is both at the initial payment and the fully indexed payment. Then what these are as a percentage of monthly income: "What percentage of my income am I promising to pay — both now and after any reset?" is the single most important fact the borrower must know. The lender of course must know this to underwrite the risk of the loan — so must the borrower.

According to the FTC, two-thirds of their study group could not tell if the loan had a prepayment fee. Whether your loan has a prepayment fee has to be a simple statement on the one-page form, which should also say whether you have a balloon payment of any kind and give an estimate of the point, fee, and closing costs.

This key information should come from and be signed by the lender, not the mortgage broker, and by the borrower, but only when they understand it. In fact, in the ideal case the borrower should be able to complete the form independently.

This all seems so obvious a thing to do. Why hasn't it happened already, years ago? Dean mortgage market reporter Lew Sichelman explained it nicely: "The mortgage business has been calling loud and clear for better laws. But infighting among the various players in the process — brokers, funding lenders, real-estate professionals, title companies, builders, appraisers, and so on — has served only to block whatever efforts put forth to improve consumer protections."

We're experiencing a historical housing and mortgage bust. It ought to give us the motivation to forget about the infighting and get the obvious implemented.

 Alex J. Pollock
Resident fellow
American Enterprise Institute
Washington