By Michelle Singletary
Sunday, August 3, 2008
A little-known provision in the Housing and Economic Recovery Act, recently signed into law by President Bush, is supposed to help home buyers understand how much debt they are taking on to purchase their home.
The law requires clear disclosure to ensure that borrowers know their maximum monthly payment -- based on the maximum interest rate allowed under the terms of their loan.
The legislation requires that lenders disclose the information to borrowers no later than seven days before closing so borrowers can shop around if they are not satisfied with the terms.
This is a good but not great provision of the law.
While it's good that borrowers will get more information before signing their loan documents, the information may still be coming too late. It's highly unlikely many borrowers will stop the process so close to closing, even after receiving the disclosure.
Since homes will continue to be sold and mortgages will be made, the take-away lesson from the current housing crisis is to be better informed. And you can start by reading my pick for the Color of Money Book Club for August.
Part of the reason we're in this mortgage mess is that many borrowers naively believed what mortgage professionals were telling them and didn't verify the information or shop around for a better deal. Some applicants didn't carefully examine the loan documents that would weigh them down with hundreds of thousands of dollars in debt for decades to come. Others didn't question many of the fees they were charged.
"Financial rape happens every day," Carolyn Warren writes in her book "Mortgage Rip-Offs and Money Savers" (John Wiley & Sons, $17.95).
I know this is strong language, but it comes from someone who should know. For more than 12 years, Warren has worked in the mortgage industry. She spent a year working for a division of Countrywide Financial, which faltered under the weight of bad loans and was taken over by Bank of America. Who better to help you navigate the mortgage loan process than an insider who knows the many tricks and traps in the industry?
"Most home buyers or people refinancing their loans know there are financial booby traps waiting, so they're on the lookout for scams and junk fees," Warren writes. "Nevertheless, they're still paying way too much."
For example, some lenders are trying to make up for less loan business these days by making more money per borrower through higher junk fees. "I'm seeing new junk fees and larger junk fees," said Warren, who now runs a business that reviews potential borrowers' good-faith estimates to look for excessive charges.
Warren advises borrowers to watch for multiple fees that cover the same service though they may be described in different terms. She points to fees that are labeled as an "administration fee" or "underwriting fee." If a borrower asks enough questions they may find the fees -- ranging from $800 to $1,200 in some cases -- are often for the same thing.
"It's like double-dipping," she said in an interview. "There's no purpose for both these fees other than to pad profit."
Warren said she'd recently seen a new fee for documents sent by e-mail. Some companies are charging borrowers for printing loan documents received electronically.
"I've seen fees anywhere from $50 to $150," she said. "In my opinion, that's like a restaurant charging you more for napkins."
I don't think for a moment that, even with more disclosure and scrutiny, the mortgage industry is going to do better by borrowers. Potential home buyers are going to have to be a lot savvier to avoid being taken advantage of. And yes, that means doing research, as simple as that advice sounds.
Whether you are new to the mortgage process or a longtime homeowner, you'll find something in Warren's book that will help you spend less on your next loan.
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To become a member of the Color of Money Book Club, all you have to do is read the recommended book. If you have a question about ways to save on your next mortgage or avoid being ripped off, join me at noon Aug. 28 at http://www.washingtonpost.com for a live discussion with Warren.
In addition, every month I randomly select readers to receive the recommended book, donated by the publisher. For a chance to win a copy of "Mortgage Rip-Offs and Money Savers," send an e-mail to email@example.com. Please include your name and a mailing address.
· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and athttp://www.npr.org.
· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.
· By e-mail:firstname.lastname@example.org.
Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.