One of the most important lessons of the mortgage collapse is that potential borrowers need clear explanations of exactly what kind of commitment they are making.
Ron Lieber writes the Your Money column, which appears in The Times on Saturdays.
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How much more should mortgage lenders have to disclose in their advertisements?
So in the last couple of years, there has been a recurring national conversation around proper disclosures, underwriting standards and fiscal prudence. All have nodded their heads solemnly and pledged to do better.
And where has this gotten us? Consider a postcard that arrived in mailboxes in September, announcing itself with a brash, declarative statement: the best mortgage on the block.
That sounds very 2005, but this is not some fly-by-night operation peddling the loan. Itâ??s ING Direct USA, the people who popularized the online savings account and have since moved into checking, investment accounts and mortgages.
The ING Direct loan is called a 5/1 Orange Mortgage, and as of early September, it came with a 3.25 percent interest rate for the first five years and a projected interest rate of 3.375 percent for the 25 years after that.
Yes, you read that right, under 3.5 percent for the next 30 years.
But that is not right, in any number of ways. First of all, by not using the words â??adjustable rate mortgageâ? or similar terms to describe the loan, ING Direct violated a simple Federal Reserve disclosure rule that was revised in 2008.
And that â??projectedâ? interest rate suggesting that todayâ??s record low rates will continue for a generation? It is utter nonsense. But ING Direct seems to have had no choice but to use the numbers that it did, because of another relatively new Federal Reserve rule.
It all sort of makes you wonder: have we accomplished anything over the last several years?
ING Direct is one of the great (and one of the few) success stories in consumer financial services in the United States over the last decade. Since it opened in the United States in 2000, the company â?? a unit of the Dutch financial services giant ING â?? has worked with more than seven million customers, and people have more than $90 billion parked there. It is the 17th-largest bank in the country by deposits.
The company grew its savings account business through savvy marketing, but it turns out to be much more complicated to explain mortgages in a handful of snappy sentences. The postcard, for example, notes that the interest rate may increase after the fixed period has ended. But in 2008, the Federal Reserve updated Regulation Z, part of which covers mortgage advertisements, in an effort to ensure clear wording from lenders so that customers would never mistake a variable rate loan for a fixed one.
The rule sets the following requirement for any entities using the word â??fixedâ? when describing in marketing materials the first period of what is ultimately an adjustable-rate mortgage: The pitch must specifically describe that loan as an â??ARM,â? an â??adjustable-rate mortgageâ? or a â??variable-rate mortgage.â? Moreover, lenders or others must use one of these terms before the first mention of a fixed-rate period in any advertisement, just so there is no confusion.
ING Direct did not do this. â??We acknowledge that the particular mailer you received lacked the specific words â??Adjustable Rate,â?? â? the company said in a statement, a copy of which Iâ??ve posted on our Bucks blog. â??Although it did say â??rate is subject to adjustmentâ?? and â??interest rate may increase.â?? The intent was to provide sufficient compelling information to prompt a customer to call for additional details.â?
The company also promised to be more careful in the future, saying that it â??will make certain that future mortgage mailers demonstrate transparency that is representative of ING Direct and that our customers have come to expect.â?
Hereâ??s the particular problem ING Direct faces in describing its loans. These terms â?? ARMs and adjustable- or variable-rate loans â?? are now dirty words among risk-averse consumers, especially those who know the trouble that such loans caused in recent years.
Still, ING Directâ??s competitors hold their noses and use the terms in their own mortgage mailings.
Why? Perhaps in part itâ??s because they also offer fixed-rate mortgages. ING Direct does not offer standard fixed-rate mortgages, so any customer scared off by its mortgages would need to go elsewhere for a loan, possibly another ING unit.
So is that the reason ING Direct seems to bend over backward to avoid using the dirty words?
â??I donâ??t share that premise whatsoever,â? said Bill Higgins, ING Directâ??s chief lending officer, who added that the bankâ??s own salespeople often suggest to customers that they would be better off with a different type of mortgage.
Meanwhile, the bankâ??s loans appear to have held up pretty well so far. Only 2.88 percent of loans originated in 2007 or earlier are more than 90 days past due at the moment, far below the national average.
But then thereâ??s the matter of the â??projected interest rate.â? Regulation Z requires companies to make a projection and insists that they use current figures to do so. Why use todayâ??s numbers? Well, nobody knows what the rates will be in five or seven years when the interest rate resets on loans like those offered by ING Direct. This rule was changed after some lenders offered teaser rates â?? say, 1 percent for only a month or so. The Fedâ??s idea was to give borrowers a sense of the rate they might face.
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