Should consumers be forced to take a class in mortgage finance before they can buy a home?

Years ago, a neighborhood activist group in one of New England’s larger cities came up with a program to help move people from being renters to being homeowners. They worked with a coalition of banks to provide the financing. But one of the key tenets of the program was that if you were part of it, you had to take a series of classes on homeownership. Renters needed to understand that the bank wasn’t going to come out and shovel the walk; when the railing fell off the front porch, it was their job to fix it.

The neighborhood group had self-interest at stake. After all, the idea was that neighborhoods are more stable with homeowners. But those new homeowners were going to be their actual neighbors. They didn’t want to see properties becoming dilapidated, or overflowing with refuse.

The results were dramatic. Under the program, there were zero foreclosures, and surveys of the program participants and their new neighbors showed that everyone seemed to benefit from understanding what it really meant to own a home.

So maybe we ought to revisit that idea, and teach people how to shop for the financing for their home. Because as sales in Massachusetts heat up again, and consumers flock back into the housing market, borrowers are exhibiting a lot of the same dumb behavior that got us into trouble in the first place.

Making A Point(s)

Last week, Fannie Mae released a new study that shows lower-income borrowers don’t do enough comparison shopping for mortgages, and that’s costing them at least $1,000 more on average at closing, plus tens of thousands of dollars more over the life of their loans. The latest report backs up similar research from the federal Department of Housing and Urban Development (HUD) a few years ago.

Fannie drew its results from its regular National Housing Survey. It discovered that 43 percent of consumers with incomes under $50,000 a year got a mortgage quote from only one source. For people whose incomes were above $100,000, only 33 percent got quotes from just one source.

Now, if you’ve got a trusted loan professional that you’ve worked with before, going back to that person exclusively might be fine. If you’ve already had one mortgage, it may be easier to figure out what you need to consider on the next one.

But that doesn’t mean it’s all lollipops and roses. Mortgages have morphed from simple 30-year fixed rate products to a bewildering array of fixed, adjustable and hybrids over varying terms. And just because someone already has gone through the process once or twice, they shouldn’t get too cocky.

The study also found most consumers are flummoxed by key mortgage elements.  Respondents were asked to estimate the maximum percentage by which the monthly adjustable-rate mortgage payment can increase over the life of the loan. Forty-one percent said they didn’t know, but among those who did offer a guess the average was about 10 percent, while the answer was actually 50 percent or more. Current mortgage borrowers’ average estimates were even further off reality.

“Homeowners who don’t obtain multiple mortgage offers or carefully compare rates are essentially leaving money on the table, particularly given today’s unprecedentedly low interest rates,” said Fannie Mae Chief Economist Doug Duncan. “Although a home purchase is the largest financial obligation most people will ever make, many borrowers do not fully understand their mortgage products and costs. As a result, some homeowners in this position may find themselves with unsustainable payments down the road.”

The Consumer Financial Protection Bureau wants a more comprehensive and easier to understand Good Faith Estimate and Truth In Lending Act form for potential borrowers. Certainly, there needs to be a streamlining of the incomprehensible forms foisted on the industry at the height of the mortgage crisis. But that’s just going to make the processor’s job easier. It doesn’t do much to insure borrowers have a clue about what they’re getting into.

Maybe it’s too much to ask that consumers understand the risk they’re taking with what is probably the biggest financial gamble of their lives. And most mortgage originators will assert that they do everything they can to educate their customers. Too many of those borrowers, though, just can’t, or don’t want to, really understand the mountain of paperwork they wind up signing.

Regulators are focused on reforming the financial industry. But maybe this is like trying to reform all the teachers, when most of the students won’t do anything to get themselves above a “D.”

Vincent Michael Valvo is CEO of Agility Resources Group LLC. He can be
reached at vvalvo@agilityresourcesgroup.com