Friday, March 23, 2007
It’s time to strengthen our nation’s mortgage loan disclosure laws. The boom in foreclosures –- perhaps as high as one in five loans made in Cleveland in 2005 –- shows that many Americans have taken on mortgages that they should not have.
When I was a credit journalist back in the ‘80s, it seemed that laws such as the Fair Credit Reporting Act adequately informed consumers of simple facts such as the difference between the interest rate and the annual percentage rate. But the rise of complicated loan deals, which is in large part to blame for the foreclosure problem, shows that too many Americans do not realize the full implications of the loans that they agree to. If anyone has perused the cable TV “deals” they get in the mail, loan-term payment contracts can be very complicated, and that “teaser” deals can be very tempting. It takes some sophistication to figure out what all the details mean in the future.
Have lenders been making “sub-prime” loans with the expectation (or even hope?) that many borrowers will lose their mortgaged homes through foreclosure? Back when I was a journalist, lending representatives convinced me that the hassles and costs of dealing with foreclosure and repossession were so great that no sensible lender would make a loan that it expected to have a great risk of default. With today’s stories, however, I am no longer so convinced.
Should the fact that some unsophisticated borrowers didn’t understand what they were agreeing to justify changing the disclosure laws to make matters more cumbersome for everyone? There is no easy answer to this question. The matter is also complicated by anecdotal evidence from places such as Cleveland and its suburbs that a large percentage of the foreclosures are occurring to homebuyers who are African American.
From the complexity of the loan agreements that I hear about, however, I am convinced that the federal credit laws need to be strengthened. In appropriate instances, government should play the role of acting paternally to slow Americans down and make sure they do not rush into deals that they do not fully understand.
The New York Times reports today that in the Cleveland suburb of Euclid, whose ordinances back in the 1920s led to the courts’ green light to land use regulation, there are hundreds of houses being foreclosed and hundreds more that are vacant. The problem of empty houses is so acute that local governments are acting to prevent vandalism and local panic.
It’s time for the federal government to respond, perhaps with a new law requiring much greater and plainer disclosure of terms, and perhaps with some outright bans on certain loan terms.