No Such Thing as a Simple Mortgage

So the McArdle-Suderman household are about to become householders.  We're in the process of buying our own little 3 bedroom, 1.5 bath slice of heaven.

Actually going through the mortgage process is a reminder of one of the reasons that things went so badly wrong during the housing bubble; we are inundated with paper.  There are disclosures about the Mortgage Disclosure Improvement Act telling us we have seven days to review any change in our APR; disclosures about the Home Valuation Code of Conduct, even a disclosure solemnly informing us that the bank intends to check credit scores and may not loan us money if there's a bad payment history of too much debt.

I'm pretty good with paperwork, and I understand all the terms being used (not to mention the laws being referenced), and I find it impossible to keep track of it all mentally--especially when you add in the tax returns, the W-2s, the bank statments and sworn certifications that all the money being used was legitimately earned or received as gifts.  In fairness, we're going through our credit union, which is apparently especially bureaucratic, but still--it's very easy to develop a sort of attentional blindness and keep signing things.  I requires heroic effort to read every document.

This illustrates, I think, the limits of transparency.  Much of this paperwork is the product of earlier acts designed to help uninformed borrowers deal with the complexity of their loans.  If you read and understand all of it, perhaps you do.  But there's so much of it that it's relatively easier to overlook something.

You could simplify offerings--outlaw anything faintly exotic.  Negative amortization loans, of course, and anything with a balloon payment--but many people got caught out by more ordinary ARMs, so maybe those should go too.  The less martial version of this thought is embodied in the "plain vanilla" default option that Elizabeth Warren, among others, has been pushing.

But you quickly start harming more sophisticated homebuyers, or those with odd situations, in order to help the naive.  A relative with guaranteed consulting income on a multi-year contract, for example, had a hell of a time getting a mortgage, because he hadn't already been enjoying that income for the requisite number of years.  That is the situation that the "no-doc" loan was designed to deal with, but the abuse by the unscrupulous has forced him to jump through many more hoops.

Or take the Mortgage Disclosure Improvement Act.  My bank offers something called "freedom lock" which allows you to reset your rate lock if rates fall.  However, thanks to the MDIA, you must lock seven days before closing, because you can't do anything to the mortgage that changes the APR without giving the buyer seven days to review.  Now, I don't really need seven days to calculate my APR, but I can't waive the provision, because otherwise, the naive would be too easily taken advantage of.  So if rates fall next week, I'll be stuck with a higher payment.

I don't know that we're striking the wrong balance; I don't need a quarter point lower rate so badly that we should expose millions of unsophisticated homebuyers to danger of being cheated.  What worries me is that there's little recognition that we have to strike a balance--or for that matter, even that there are tradeoffs.  Everything that ever disadvantaged someone is automatically assumed to be a terrible product feature that ought to be eliminated.  That instinct is what most worries me about the new CFPA.