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Now, you can see through mortgages

It's tough steering the middle of the road on the issue of housing. A proponent of neither "the sky is falling" nor "the sky's the limit" schools of real estate prognostication, I'm hit by accusations that I'm a shill for one side or the other.

By James Thorner, Times Staff Writer
Published October 8, 2007

It's tough steering the middle of the road on the issue of housing. A proponent of neither "the sky is falling" nor "the sky's the limit" schools of real estate prognostication, I'm hit by accusations that I'm a shill for one side or the other.

So I noted with interest a Florida law that took effect Oct. 1 that requires greater transparency in mortgage lending. A centerpiece of the law requires mortgage brokers to disclose commissions banks pay them.

Generally, the higher the interest rate, the more the broker stands to make. Brokers call it "being paid in the back." No doubt it encourages unscrupulous brokers to push junk loans on unsophisticated home buyers. Maybe a family qualified for a 7.8 percent loan but got 9 percent instead. A Boston Globe columnist last week called the practice a "bribe."

So the Florida law is a ray of sunshine in a murky industry. But despite the potential for corruption in bank-to-broker arrangements, it's unwise to blacken the whole business.

Here's reality: High interest loans with prepayment penalties were the only mortgages for which hundreds of thousands of Floridians qualified. In a less hyperactive market, crummy credit scores and spotty employment histories would have locked them out.

Just as many buyers were investors who didn't much care what rate they got. They planned to flip the house before payments became onerous. It's akin to a person lackadaisical about his high interest credit card because he pays off his bill every month. Neither buyer was substantially duped, though grandstanding politicians will make that case.

Don't believe consumers were gulping their own poison? Consider those "no closing cost" home loans plugged on the radio. People flock to them, judging by the loan volume each month. I called about one such offer. They pitched me an interest rate 1.5 percent higher than I was paying.

Here's how it works: They waive $2,500 in closing costs, but banks pay them thousands "in the back" to push higher interest rates. Same old story the Boston Globe complains about. Over the life of the loan, you'll pay tens of thousands of dollars more in interest, making a mockery of the initial savings.

So while I'm all in favor of full disclosure on loans, don't underestimate some consumers' tendency toward self-destruction.

James Thorner can be reached at thorner@sptimes.com or 813 226-3313. Read and comment on his (Un)Real Estate blog at blogs.tampabay.com/realestate.

[Last modified October 5, 2007, 23:23:01]