Federal banking regulators earlier in the week released two illustrations designed to help borrowers better understand the terms of the mortgage that they’re getting (of course, that assumes that someone is still actually going to fund a subprime loan, but that’s an entirely different story). The illustrations and request for comment is here. Essentially, the illustrations were developed to help banking institutions adopt subprime lending guidance issued by regulators in July:
The Agencies believe that illustrations of consumer information may be useful to institutions as they implement the consumer information recommendations of the Subprime Statement. The Agencies appreciate that some institutions, including community banks, may prefer not to incur the costs and other burdens of developing their own consumer information documents to address the issues raised in the Subprime Statement, and could benefit from illustrations like those below. Use of the proposed illustrations is entirely voluntary. Accordingly, there is no Agency requirement or expectation that institutions must use the illustrations in their communications with consumers.
I should warn you that these aren’t illustrations in the children’s book sort of way, which is what I was thinking when I first delved into the document. They’re probably better described as an FAQ followed by a scenario — the first “illustration” is an FAQ of sorts that presents basic terms like balloon payments and escrowing in plain English; the second “illustration” summarizes differences between a hypothetical 2/28 and a standard 30-year fixed mortgage. I personally think that actual illustrations might be more useful — you know, some sort of bar chart showing how payments can jump on payment resets, or what can happen if housing appreciation rates slow to an annualized 1 percent for the next four years. Something like that. I don’t know that the average borrower is going to look at these two pages and feel any better informed; they might just be better confused.