Bill Aimed at Predatory Refinancing Puts the Wrong Burden on Lenders

Whether there is a net benefit depends in part on how critical it is to the borrower to lower the payment. Perhaps the alternative to a payment reduction is default. Only the borrower knows.

Risk-reduction refinance: When interest rates are expected to rise, many holders of adjustable-rate mortgages consider converting them to fixed-rate mortgages. The borrowers making the switch are willing to pay a higher rate now in exchange for future rate certainty. On this issue, lenders are in no position to substitute their judgment for that of the borrower.

In sum, no matter why borrowers refinance, the question of whether they receive a net benefit should be for borrowers alone to answer. Lenders do not have the information needed to second-guess them.

However, borrowers often make their decisions on the basis of incomplete and even misleading information from lenders. Instead of requiring lenders to assume responsibility for borrowers' decisions, let's make them responsible for providing borrowers with the information they need to make their own decisions.

The formulation of disclosure rules has long been viewed as a proper responsibility of government, because this is the only way to assure uniformity of disclosures across the market. But the federal government has proven that it is not up to this task. The existing mandatory disclosure rules are obsolete and shamefully inadequate. Every attempt to fix them gets bogged down in politics. It is time to try making lenders responsible for disclosures.

Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site, http://www.mtgprofessor.com.

Copyright 2007 Jack Guttentag

Distributed by Inman News Features