Now that she has a new job, Harvard law prof Elizabeth Warren isn't wasting time getting started. In her first week as an assistant to President Obama, the consumer protection expert began work on an effort to simplify the morass of paperwork that accompanies mortgage transactions.
Here’s a piece I wrote for AOL’s Housing Watch that takes a look at the effort — and explains why it’s an important project.
When I saw that Elizabeth Warren had begun her duties as President Obama’s consumer-protection watchdog by holding a forum Tuesday on simplifying mortgage paperwork, one of the first things that popped into my head was a neat trick that a few mortgage professionals liked to pull back in the heady days of the home-loan boom.
When a customer insisted on a fixed-rate loan, but the mortgage workers could make more money by selling her an adjustable-rate one, the folks handling the paperwork had an easy solution. They positioned a few fixed-rate loan documents at the top of the stack of paperwork to be signed by the borrower.
They buried the real docs — the ones indicating the loan had an adjustable rate that would zoom upward in two or three years — near the bottom of the pile.
Then, after the borrower had flipped from signature line to signature line, scribbling his or her consent across the entire stack, and gone home, it was easy enough to peel the fixed-rate documents off the top and throw them in the trash.
This bit of bait and switch was just one of the many examples of the derring-do dreamed up by the bad boys of the mortgage industry. Of course, the Department of the Treasury being the Department of Treasury, its press release about Tuesday's paperwork reform meetup didn't give much sense of the creativity and audacity of mortgage professionals who seek to take advantage of unsuspecting borrowers: "Event Brings Together Stakeholders to Discuss Path Forward to Simplify Mortgage Disclosure Forms, Empower Consumers With Better, Easy-to-Understand Information."
Salon's Andrew Leonard notes that, after all the excitement in Washington over whether Warren would be appointed chief of the new Consumer Financial Protection Bureau, streamlining disclosure rules seems, well, boring. It has, Leonard says, a "closing-the-barn-door-after-the-farm-has-been-foreclosed-upon" feel to it.
Leonard's a smart writer, but in this case, I think, he's a bit off base.
Now that she's been named as a presidential assistant charged with helping set up the new consumer bureau, Warren is right to focus on the most basic of concerns: making sure mortgage borrowers know what they're getting.
Can't get no satisfaction
The complexity and volume of the paperwork associated with signing up for a home loan makes it easy for unscrupulous professionals to abuse consumers – misleading them about how much they'll pay and what flavor of loan they're getting and slipping in all manner of junk fees. My favorite junk fees are a pair of charges that sound important (and even seem to hint at romantic bliss) but are in fact meaningless: "commitment fees" and "satisfaction fees."
One reason the mortgage market is in bad shape now is that millions of borrowers were misled or mistaken about the details of their loans. Without a clear-eyed understanding, it was impossible for them to make informed decisions about whether to go through with the deals.
"Too often, families come to understand the legalese only when they get bitten by it," Warren noted Tuesday. "This is particularly true in the mortgage market, where borrowers receive stacks of incomprehensible paperwork when they're looking for a loan."
Buyer be wary
Anybody who's in the market for a mortgage these days should take note of the Harvard law professor's words. And don't wait for the bureaucrats to simplify the paperwork before you commit to becoming a smart – and skeptical – consumer.
Here's what I like to tell friends who are getting ready to go through the mortgage process:
- Don't let yourself be intimidated by a stack of documents. Read every page.
- Hire a lawyer who represents you – not the lender – and will go over the contracts with you. Or at least bring along a trusted friend or relative who understands money and mortgages.
- Demand that your lender take out junk fees. Be prepared to push away from the table and walk out if something in the paperwork doesn't seem to be on the up and up.
- Above all, don't let the professionals rush you through a loan closing. If somebody is trying to rush you, that should be a red flag.
I know. Reading through all that paperwork is boring. It can make your head hurt. But it's necessary -- and vital to protecting yourself in a marketplace where bad practices still linger.