Monday, September 14, 2009

Why we need consumer protection for mortgage borrowers: a story

A few years ago, I went to a Joint Center for Housing Studies sponsored conference at the Harvard Business School. While my memory may be faulty, the broad outlines of the following story are true.

During a discussion for the need for consumer protection, a Harvard Law Professor (it may have been Elizabeth Warren, but I am not sure) asked those in the room with an Adjustable Rate Mortgage to stand up--perhaps half the room did so. The professor then asked how many of those standing could name the index to which their loan rate was tied. Those who didn't know were asked to sit down, at which point half of the original group remained standing. The next question was about the size of the margin between in the index rate and the loan rate, at which point another half sat down. Finally, those who remained standing were asked if they knew roughly the maximum payment that they could make on their mortgage--only one person remained standing (and the person sitting next to me said, "I know that guy--he would never admit that he didn't know something in public anyway.")

So here is the point: a crowd of Harvard, Yale, Michigan, Princeton, etc professors and top policy makers did not fully understand the mortgages they had. How can we expect someone armed only with a high school diploma and no consumer finance training to knowledgeably negotiate the world of mortgages?

I used to cringe at the thought of imposing "suitability standards" on lenders. No more.


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