Mortgage customers don't know what they're doing

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Back in October, The Federal Reserve released a startling -- and widely ignored -- study showing that a large chunk of recent home buyers know almost nothing about their mortgages. Here are some findings from the Fed's survey:
  • 25% could not identify the APR on their mortgages.
  • 25% didn't know how much they spent on settlement charges.
  • 50% didn't even know much the loan was for.
  • Two-thirds were unaware of any prepayment penalties.
  • 75% did not recognize that the loans included charges for optional credit insurance.
Major, major props to Forbes' Josh Zumbrun for digging this up. Zumbrun adds that "It's a point you don't hear much about. Yes, lenders maliciously tricked borrowers, and yes, frenzied speculators bought houses they knew they could not afford. But it's just as true that a lot of well-intentioned people simply signed mortgages they did not understand."It's easy to understand why this happens: home buyers are asked to sign a slew of documents -- some lawyers explain them in detail, some don't -- and then sign their names to indicate understanding.

This is the equivalent of assessing a second grader's competence in math by handing him a sheet of math problems with answers and asking him to sign that he understands. If he signs, he gets an A+!

One possible solution: to get a mortgage, borrowers should be handed a "quiz" with questions like "What is the APR on the loan?" and "Describe any pre-payment penalties." Then the borrower would have to rifle through documents -- and ask the lawyer -- to find the answers to those questions. If we did that, every home buyer would understand her mortgage.
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