Mortgage Forms Sow Confusion

With mortgage delinquencies and foreclosures soaring, federal researchers have identified a key contributing factor: Many borrowers simply do not understand their mortgages -- especially subprime loans that come with complex features and costly penalties.

As a result, too many people are ill-prepared to handle jolting payment hikes and rate-reset deadlines.

In a study involving 819 recent prime and subprime mortgage customers in 12 locations around the country, the Federal Trade Commission found that, using current truth-in-lending and good-faith-estimate disclosures:

· Nearly nine out of 10 borrowers could not identify the correct amount of upfront charges connected with a loan.

· Four out of five had trouble understanding why the stated interest rate on the loan note was different from the annual percentage rate, or APR, highlighted in the truth-in-lending disclosure.

· Two-thirds did not spot a potentially dangerous snare lurking in the loan -- a substantial penalty if they refinanced within the first two years.

· Nearly a quarter could not correctly identify the total amount of settlement costs.

In a series of intensive interviews with 36 people who recently bought a home or refinanced, the researchers also found that "many borrowers were confused by the current [truth-in-lending and good-faith-estimate] mortgage cost disclosures" mandated by federal law, the study says.

"Many borrowers also did not understand important costs and terms of their own recently obtained mortgages. Many had loans that were significantly more costly than they believed, or contained significant restrictions, such as prepayment penalties, of which they were unaware."

Equally troubling, borrowers often said they had no idea of their loan costs or terms until they went to closing, "and some appeared to learn for the first time during the interview," the study says.

Some of those borrowers said they had spent considerable time shopping and comparing rates before choosing their mortgage. But they still had problems understanding the disclosures they were provided.

So where's the breakdown in the system? Are modern mortgages so complicated that they are beyond the grasp of even experienced consumers? Or are the federally mandated truth-in-lending and good-faith-estimate disclosures not doing the job? Are the disclosures themselves part of the problem?