Want a Cheaper Mortgage? Talk to People!

Harvard's Cassi Pittman has written a heartbreaking paper detailing the results of a series of interviews with black homebuyers in Atlanta. It turns out that if you want to know whether someone's likely to have taken out an unsuitable or predatory loan, you only really need to ask one question: how many people did you turn to for advice before taking out the loan?

The borrowers who "did not want to bother anybody" and took the advice only of a mortgage broker were generally elderly people talked into multiple subprime refinancings which did a great job of wiping out their home equity. But first-time homebuyers, too, were very unlikely to ask for advice, and less than half of them even consulted the internet.

Those borrowers who did get credit counseling or other advice generally did very well indeed: one great story is that of Gladys, who was astonished and transformed by her quick move from homeless to homeowner. But the most memorable story concerns Ms Park and Ms Smith, two single mothers, both of whom started out with a credit score of about 620, and both of whom were buying a house for about $130,000. Ms Smith used a broker; so did Ms Park, but she also had credit counseling and signed up for a prepurchase homebuyers class. In the end, Ms Park's 30-year fixed-rate payment of $790 a month was substantially lower than Ms Smith's two-year teaser rate of $1,000 a month, let alone the 11.5%, $1,278 payments Ms Smith had to start making in year three.

A huge amount of subprime pain could have been avoided, I think, if only there weren't such an unhealthy taboo surrounding talking about money. That taboo exists in both black and white communities, of course, but I can definitely see a case for Wu Tang Financial. The more sources of information there are, and the more likely they are to reach borrowers, the better for everybody - except the predatory lenders, of course. But failing that, at the very least it's worth trying to get the word out that mortgage brokers are not your friend. A huge part of the population seems to think they're working for the borrower, when they're not.

(Via Miller)