Understanding consumer behavior in mortgage market

It is the responsibility for all parties engaged in the mortgage market to ensure that consumers have access to "good loan" products.

Mortgage industry leaders must not only define a series of best practices, they must also put in place mechanisms that insure compliance by all industry participants.

The "high roaders" must work together to drive the "low roader" practices out of the marketplace.

The recent surge in foreclosures results in large part from the growth of non-prime lending and the extension of loans to borrowers with a more limited capacity to repay.

Lastly the FRB raised the possibility that "minority borrowers are incurring prices on their loans that are higher than warranted by their credit characteristics" which could trigger fair lending concerns. In other words, one potential conclusion is that the observed patterns could be the result of illegal targeting of protected classes.

Aggregation across lenders could dampen the magnitude of a more significant racial gap recorded for a particular lender.

Many consumers lack both the information and the capacity to evaluate the merits of alternative mortgage products and, as a result, are easily influenced by "push marketing" tactics.

Through aggressive product promotions and advertising, mortgage lenders can influence consumer choice and encourage consumers to select a mortgage that may not be in the consumer's best interest.

Shopping by consumers may not provide the market check that is present in less complex markets where consumers are better informed and/or more capable of making judgments on their own.

Mortgage market outcomes do not adhere to the "one price rule" --that in an efficient market the same good is priced identically throughout the market place. Industry Compensation Structure May Further Distort Market Outcomes Today's complex and highly competitive financial services environment has driven the development of new products and new approaches to market and sell these products.

Economic theory characterizes the consumer choice process as one where consumers act "rationally." Other studies suggest that the order in which information is presented to consumers also matters.

Overall, the study found that many students focused on loan attributes other than APR.53 The difficulty consumers have with making decisions that involve payments over time goes beyond their limited ability to solve the relevant mathematical equations.

Borrowers with reduced teaser rate loans may suffer the most serious consequences, and currently carry the highest risk of default.55 The growing body of behavioral economics literature also suggests that consumers have differing and often inconsistent time preferences depending on how the choices regarding payment over time are framed. Many of today's innovative loan structures are being driven by the nation's housing affordability problems that confront consumers.

Overall, borrowers are not aware that they generally pay a premium for the convenience of obtaining a "no-doc" loan product. It is important that the CBO organize community events in a way that streamlines the process of getting into a "good loan."

The consumer leaves with a solid option in hand for a "good loan" and still has the option to conduct additional shopping.

Existing disclosures may inadvertently provide a shield that protects "push marketers" from being held accountable for any unethical behavior in the lending process. At the same time, providing consumer disclosures on a more accurate and timely basis could help improve the effectiveness of the "Second Opinion" networks discussed earlier.

Strengthening the Guidance and creating uniformity aligns the industry with the goal of promoting access to good loans.

While broker licensing bills have been proposed in Congress in the past, it is important that any licensing requirement does not preempt good state laws and allows for states to continue innovating in this arena.

Regulation and Other Collective Action Approaches to Enhance Fair and Efficient Lending 51 that the loan is consistent with both the short-and long-run interests of the consumers, and that consumers have a reasonable prospect of being able to repay the loan.

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