How the CFPA would stop neg-am mortgages
Beer and Numbers asks for the grounds on which a consumer financial protection agency would ban a particular negative-amortization mortgage. I can think of a few.
First of all, the spreadsheet which BN helpfully provides is, as he notes, extremely misleading: it shows only the minimum monthly payments (and to make matters even more confusing calls them the “maximum monthly payment”). It doesn’t show what happens to the principal amount outstanding if you make the minimum payment. It doesn’t show what happens to your minimum payment if you actually make the minimum payment every month, and then reach the limit of how much your loan principal is allowed to rise.
Secondly, any self-respecting CFPA would insist on big fat warning signs to be plastered all over any negative-amortization mortgage. If you pay less than the interest amount, the amount you owe will rise. If you hit the upper limit on the amount you owe, your minimum monthly payment will be at least $X. This is a product designed for people with lumpy, irregular income, who are able to make large payments a few times per year at least. If your only source of income is a regular paycheck, this product is not for you. If you can’t pay down your mortgage principal, the best case is that you will be forced to sell your house, the worst case is that you will end up being foreclosed on. Etc.
BN dismisses much of this as “treating the lenders like cigarette makers who aren’t allowed to direct advertising to minors”. Well, yes. Most Americans are not financially literate, and they should be protected from harmful financial products just like they’re protected from cigarettes, or even, to use Elizabeth Warren’s favorite example, toasters. If a product is only suitable for financial sophisticates, then either it should be restricted to financial sophisticates, or else, at the very least, it should come with very loud and clear warning signs attached for anybody who isn’t a financial sophisticate.
Yes, there’s something fundamentally paternalistic about the CFPA — but it’s paternalistic in a good way, helping steer people away from harmful financial products. That’s nothing to be embarrassed about; indeed, it’s the main reason to found the CFPA in the first place. It might be a while before neg-am mortgages rear their ugly head again. But if and when they do, let’s hope the CFPA is around to stop them being sold to people who have no business buying one.