Confusion rife for borrowers, study finds
If you were confused by the disclosure forms your mortgage lender gave you, you're far from alone, according to the Federal Trade Commission, which says the industry can do a better job.
A study released Wednesday by the agency found that the required disclosures were ineffective at explaining the costs and risks of home loans.
"Mortgage disclosures designed more than 30 years ago can be confusing even for simple loans, and they do not address the variety and complexity of today's mortgage products," FTC Chairman Deborah Platt Majoras said in a statement. .
The issue is timely. In the wake of the housing market's boom and subsequent slowdown, as well as the meltdown in sub-prime mortgages, many homeowners have said they didn't understand the terms of the loans they took out.
This has been especially true with increasingly popular but complicated products such as "option ARMs" -- adjustable-rate mortgages that let borrowers choose their payment amount each month and can even increase the total amount they owe on their loan.
The FTC doesn't have jurisdiction over loan disclosures, but it decided to examine them after many borrowers complained to it of deceptive tactics used to sell them home loans.
The agencies that do oversee mortgage disclosures are the Federal Reserve and the Department of Housing and Urban Development, which respectively monitor the nation's truth-in-lending law and the law governing real estate settlement procedures. Both agencies agreed that home loan disclosures were too complex and said they were working on solutions.
"Broadly speaking, we are all singing the same song," said Brian Sullivan, a spokesman for the Department of Housing and Urban Development. "The process of buying and selling a home is second only to rocket science in its complexity."
In the FTC study, more than 800 recent mortgage customers were each given disclosure forms for a hypothetical loan. About half got forms of the type currently used. The rest got prototype forms designed by the study authors to be understandable.
The study found that when given the disclosures now used:
* Half the borrowers couldn't correctly identify the loan amount.
* Nine in 10 couldn't figure out the total upfront cost of the loan.
* Two-thirds did not recognize that they would have to pay a penalty if they paid off the mortgage within two years. And 95% didn't know how much that penalty would be.
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