The StarTribune did a good piece on two vunerable adults who were preyed upon by unscrupulous mortgage brokers and lenders. While this article is about two people who were legally classified as vunerable adults, the reality is that when it comes to understanding personal finance, especially the more complex issues involved in subprime loans, many Americans are vunerable adults.
How many people can explain what “APR” is, beyond saying it is the interest rate on the loan? Can they explain what “interest” is? Can they explain how “interest” and the APR of a loan are actually calculated? How about “finance charge”? These are important enough items that the Truth In Lending Act mandates that they be clearly disclosed to a consumer in a specially marked set of boxes on the loan documents. I would be surprised if 1 out of 100 American homeowners, who are not real estate agents or mortgage lenders, could explain to me all the numbers on their HUD-1 settlement statement and Truth In Lending disclosure.
Now throw in the fact that, subprime loans are marketed to (read pushed on) lower income people, who almost by definition have less education; add in sophisticated marketing playing on the psychology of the great American dream of owning a home; big bonuses for selling a subprime loan; and subtract meaningful oversight and regulation, what do you think the result will be? Even without being a cynic, you should be able to see a recipe for disaster.
So what is the answer? Beyond regulation, regulation, and more regulation coupled with a real enforcement mechanism, I am not sure, but I would start with a long hard look at the mortgage brokerage industry, non-CRA lending institutions,and the whole securitization process. We need to make sure that everybody has a real interest at stake throughout the life of the loan. As we learned with the Freddie Mac and Fannie Mae bailouts and the Wallstreet bailout, if someone knows that 10 minutes after the deal is done, they have got their money and the rest is someone elses problem it is only a matter of time before the next meltdown.
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