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Paul Kiesel
Paul Kiesel
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Consumers Don't understand Mortgage Documents

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Mortgage disclosure statements prove baffling to most consumers.

The Federal Trade Commission completed a study of 800 consumers throughout the country providing them Standard disclosures for “fixed” rate mortgages to determine their level of understanding. Remarkably the majority shown a standard disclosure form were totally baffled. The FTC found that the required disclosures were ineffective at explaining the costs and risks of home loans. “Mortgage disclosures designed more than 30 years ago can be confusing even for simple loans, and they do not address the variety and complexity of today’s mortgage products,” FTC Chairman Deborah Platt Majoras said in a statement.

The Los Angeles Times has extensively reported on the complexities of Option Adjustable Rate Mortgages and the dangers faced by consumers who acquired such loans. The issue is timely. In the wake of the housing market’s boom and subsequent slowdown, as well as the meltdown in sub-prime mortgages, many homeowners have said they didn’t understand the terms of the loans they took out.

In the FTC study, more than 800 recent mortgage customers were each given disclosure forms for a hypothetical loan. About half got forms of the type currently used. The rest got prototype forms designed by the study authors to be understandable.

The study found that when given the disclosures now used:

• Half the borrowers couldn’t correctly identify the loan amount.

• Nine in 10 couldn’t figure out the total upfront cost of the loan.

• Two-thirds did not recognize that they would have to pay a penalty if they paid off the mortgage within two years. And 95% didn’t know how much that penalty would be.

This has been especially true with increasingly popular but complicated products such as “option ARMs” — adjustable-rate mortgages that let borrowers choose their payment amount each month and can even increase the total amount they owe on their loan.