Seldom-read home loan docs must change: experts

By Diane Bartz

WASHINGTON (Reuters) - The papers that U.S. borrowers sign when buying a house are piled so high that few people read them all, and even fewer absorb the information.

While no one blames the subprime crisis on complex documentation, some people now losing their homes as adjustable rate mortgages rise might not be in such dire straits if they had fully understood their loan, experts say.

These critics of the current documents say it is time to require home mortgage lenders to prepare a short, plain-English summary of each loan so consumers actually know what they are signing. Many in the housing industry agree.

Luke Froeb, a former director of the U.S. Federal Trade Commission's Bureau of Economics, says a drive in recent years to give borrowers more information has backfired. Additional data and legalese has turned the forms into perhaps a dozen pages of fine print.

"The disclosures have gotten so large that nobody ever reads them any more," said Froeb, who now teaches at Vanderbilt University.

Research by the FTC found that half of the borrowers it surveyed could not identify their loan amount in mortgage papers. One-third could not identify their interest rate. Two-thirds did not know if their mortgages had prepayment penalties, a feature which can make refinancing effectively impossible.

In response, the FTC tested simplified versions of the documents -- the longest was three pages -- and a follow-up study showed it made a big difference. The number of questions answered correctly rose to 80 percent from 61 percent, the FTC found.

"This is such low-hanging fruit. This is absolutely so easy to do and to accomplish," Froeb said.

Mortgage brokers, who helped kill a 2002 proposal by the Department of Housing and Urban Development to expand mortgage disclosures, said they enthusiastically support the redesign.

"Consumers today do not understand the forms that they sign," said Marc Savitt, president-elect of the National Association of Mortgage Brokers. "All (loan) originators should disclose in the exact same forms and in the exact same manner. ... the FTC is right about this."

The Federal Reserve, Treasury Department, Federal Deposit Insurance Corp and other banking regulators have proposed a two-page form that lenders could use to summarize monthly payment terms of an adjustable rate mortgage.

The form, which would be voluntary, also includes brief descriptions of loan terms such as prepayment penalties, balloon payments and taxes and insurance.

Rick Farr, partial owner of United Capital Mortgage Assistance, firmly believes that inadequate information hurt many of the people who call his company for help in preventing foreclosure.

In many cases, when lawyers, real estate agents, buyers and sellers gather to close on a sale, the terms of the loan were such that "the only people at that table who didn't think there would be a problem with the loan was the (new) homeowners," he said.

Lawmakers are among those who have failed to read their mortgage details and are interested in making them easier to absorb.