The Secret is Out.....

The Secret is Out!  Why the consumers feel victim to the sub-prime lending scandal. ( It is a scandal isn't it?-I do not want to cause trouble here with my choice of words)

The consumers that were victims couldn't understand their Good Faith Estimate and didn't understand that the rates would change and didn't see it spelled out anywhere the consequences of what the accelerated costs of the loan were going to be when the rates went up. Whew! That was a long sentence. I read a report that these unknowing consumers could have been saved from their their cruel and unknowing dilemma if only they had be given a form that spelled out clearly all the terms of loan. No such form exists today-well, at least not yet. And a one page disclosure may be a bit optimistic too. Read on... it gets a lot better.

For decades now, government and industry alike have been calling for simplified rules governing the mortgage industry lending process. Eleven years ago Congress asked the Federal Reserve Board and HUD to come up with as they referred to it... a better mouse trap. ( I personally don't care for their choice of words but supposedly those were the words used to describe what they were looking for)The Federal Reserve Board and HUD couldn't  agree so they turned their conflicting ideas  back to the lawmakers. Congress never acted. For many of us involved with the state associations and the National Association of REALTORS, we lived through all this arguing and failed proposal after proposal.

In the Clinton Administration, Andrew Cuomo tired. Nothing again. In the Bush's first 4 years, his housing secretary tried. Nothing. Now the current Secretary has picked up the gauntlet and you guessed it, nothing so far. The biggest problem is that the industry itself can not come to terms with exactly how to move forward on the consumer protection side of the issue.

The sub-prime conundrum has generated new calls for the good faith estimate and the settlement statement to more nearly match. Preferably in a one page concise document. Not to be...that is until one man working alone come up with a away to design the form that reflects the best of all efforts. The one page is actually three but the last two pages are a glossary of terms that make the first page understandable. The genius is Alex Pollock a research fellow with American Enterprise Institute. With years of experience in the banking industry, Pollock knew what was needed and has proceeded to create it.

Among the highlights of Pollacks one pager:

• Loan Amount
• Loan to value ratio
• term and maturity date
• start rate and for how long, if and when a higher rate will kick in
• maximum possible rate
• monthly payment as a % of income ( including taxes and insurance at the beginning and at the fully indexed rate
• prepayment fees
• balloon payments
• amortization schedule ( periodically)

With a boldface type stating: DO NOT SIGN THIS IF YOU DON'T UNDERSTAND IT !

Pollack has not shown his work to HUD, the FTC or Congress as yet. Only time will tell if anything comes of all his hard work. At least we now know why the consumers feel victims that have been so put upon by the Lending Industry. If you buy into the premise that the consumer just didn't know, didn't understand, well, anything is possible I guess, we have the secret of why so many feel they are victims. The arguments though have been around a lot longer then the sub-prime issue causing so many defaults these days. But at least getting an understanding of how the system could be improved is educational and probably a good thing to know. The secret is out indeed.......