[This account of lending practices that originally appeared here on June 14th, 2007 goes a long way in explaining how the housing bubble got to be so big ... and so destructive.]

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Today’s LA Times report of a study by the Federal Trade Commission confirms what many observers may have suspected about mortgage lending disclosure during the housing boom a couple years back – even if home buyers cared about the price they were paying, they had only a fifty-fifty chance of finding it on their loan documents.

“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.
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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.

The FTC doesn’t have jurisdiction over loan disclosures, but it decided to examine them after many borrowers complained to it of deceptive tactics used to sell them home loans.

The agencies that do oversee mortgage disclosures are the Federal Reserve and the Department of Housing and Urban Development, which respectively monitor the nation’s truth-in-lending law and the law governing real estate settlement procedures. Both agencies agreed that home loan disclosures were too complex and said they were working on solutions.

The study found that half the borrowers couldn’t identify the loan amount, 90 percent couldn’t figure out the upfront costs, and two-thirds couldn’t find the prepayment penalties.

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