Fuller Disclosure

HUD's modest step toward a more transparent housing market

FOR ALL THE recent troubles in the housing market, homeownership is still a big part of the American dream. But for millions of people, the dream turns momentarily nightmarish when they sit down at closing, take up a pen and nervously start signing a sheaf of complicated documents whose fine print only a seasoned real estate lawyer can comprehend. The cost is not only emotional but financial. Complexity makes it harder for people to compare the true price of competing mortgage products. A 2008 Urban Institute study, sponsored by the Department of Housing and Urban Development (HUD), found that "complicated loan arrangements raise the total costs to homebuyers," often by hundreds of dollars per transaction. The burden is especially heavy for minorities and those with less education. But the issue affects everyone: During the subprime mortgage boom, unintelligible terms helped to lure many people into loans that they could not afford, and the whole country is now paying for that disaster.

In an ideal world, borrowers would get a simple one-page document that clearly laid out the benefits and obligations of buying a home. Alex Pollock, a former official of the Federal Home Loan Bank Board, has suggested one that spells out the loan amount, interest rate and special features such as prepayment penalties, concluding with the capitalized admonition: "DO NOT SIGN THIS IF YOU DON'T UNDERSTAND IT!"

The next best thing would be a more transparent version of the current standard HUD disclosure forms. And, more than 30 years since the last revisions, the department has produced one. Not surprisingly, given the many compromises among builders, brokers, bankers and other stakeholders, the new documents are not as revolutionary as Mr. Pollock's model, but they are an improvement. In particular, they require better disclosure of lender payments to mortgage brokers, known as "yield-spread premiums," or YSPs. These broker fees are based on a loan's interest rate; the greater the difference between the agreed-upon rate and the lowest rate for which the borrower qualifies, the higher the YSP. In recent years, poorly disclosed YSPs may have incentivized brokers to steer buyers into inappropriate subprime loans. But such loans are not always a bad deal, since a higher-rate loan may work for those who prefer to pay closing costs over time in the form of interest. The key is giving borrowers the tools to make a truly informed choice.

Mortgage brokers, who sell the majority of home loans, oppose the new regulation, which HUD issued in November but which does not take effect until Jan. 1, 2010. On Dec. 19, they filed suit in U.S. District Court to block it. Brokers say that the provision discriminates against them because it does not apply to banks, whose compensation for selling loans on the secondary market can also vary with interest rates. But HUD properly drew a distinction between giving consumers more information about all the factors that have gone into their transactions, as opposed to requiring projections about what banks might get in a future resale of their loans. The new rule constitutes a modest but necessary step toward a more transparent housing market.