We should all applaud easier-to-understand mortgage documents
The Consumer Financial Protection Bureau plans to overhaul how we get home loans into something that makes it easier for borrowers to understand what kind of loan they're getting and how much it will cost.
This summer, the bureau will propose rules that address the biggest problems that mortgage borrowers face. Borrowers will get a more complete and comprehensible Good Faith Estimate of costs.
Before the sale closes, borrowers will get one form -- just one! -- telling them what interest rate they'll pay, how that interest rate could change over the life of the loan and how much money they'll need at closing.
At least one bank doesn't like the proposed rules.
Big Spring Bank in Big Spring, Texas, has filed a lawsuit challenging the consumer bureau's constitutionality and other aspects of Dodd-Frank, a law that aims to rein in abuses in the financial industry.
Overall, banks seem to like this idea, but they want to "go slow."
About five years ago, the real estate world blew up and took the economy with it. Banks, it turned out, had been writing questionable loans to people who were either willing to take too much risk or who didn't understand how much risk they were taking when they accepted an adjustable-rate or balloon-payment loan.
A whole lot of those people defaulted.
Banks nearly drowned (and some are still drowning) in foreclosed properties, which they weren't set up to manage, maintain or resell in anything like that quantity.
Real estate values tanked.
Millions of people have been kicked out of their homes, and millions more now are underwater on their home loans.
Bank balance sheets, of course, also took a major hit when lots and lots of borrowers defaulted. I seem to remember something about banks eagerly accepting taxpayer bailout money.
Banks do seem to have gotten a little smarter about offering stupid loans to unprepared people. But there are still going to be borrowers who don't really understand the terms of the loans they're getting.
Consider Shelly, a former neighbor of mine and a single mother with two kids who bought a home with an adjustable-rate mortgage.
Shelly is bright and pretty and certainly an adult, but she wasn't up to turning nearly 100 pages of forms, all written in financial-ese, into a genuine understanding of the loan she was taking.
When the payments jumped, she and the kids left.
A bank representative came around, asking neighbors where she'd gone. She'd moved so fast that none of us knew.
Like Shelly, other borrowers who don’t really understand their loan terms are at extra risk of defaulting. If enough of them default, there's a pretty good chance we'll get right back into the fun economic freefall that began in 2007.
If borrowers did understand their loans, on the other hand, at least some of them would say something along the lines of "Hey, wait a minute, this isn't what I thought I was getting" or "You must be kidding, I can't possibly afford that!"
Some of them would get different loan terms. Others wouldn't get a loan at all, and either way, we'd get to skip a great deal of economic risk, as well as a generous serving of human suffering.
And the banks "want to go slow."
Bankers, this is not a high school date. We aren't discussing if or how soon we'll end up in the backseat of your dad's car.
Everybody, including banks, benefits when borrowers get simpler, clearer information about their loans. Banks should have come up with clear, simple forms and language years ago.
The subprime crisis handed regulators the leverage they need to get simpler, clearer disclosure done now, and they should use it -- immediately, before the crisis recedes any further.
Banks should cooperate. In fact, they should get out in front and show us how fast they can fix this problem. None of us need to live through 2007 again.