Mortgage Lender Advertising Under Fire

There is a new FTC study being quoted by bloggers all over the web and reported in major newspapers like the LA Times and Washington Post by real estate columnist Kenneth R. Harney who I must say when it comes to mortgage issues is more often wrong than right.

The study (if true) makes some amazingly ominous claims:

· Nearly nine out of 10 borrowers could not identify the upfront total costs.

· Two-thirds did not spot a “prepayment” penalty if they paid off the mortgage within the first two years.

· Nearly 25% could not correctly identify the total amount of settlement costs.

The chart below…click to enlarge…shows the staggering ignorance (supposed) of the average home owner when it comes to understanding some pretty easy to understand terms as well as some pretty complicated terms.

One of the measures indicates 51% can’t currently locate their loan amount…now that’s pretty hard to believe!

This one particular data point got me thinking I should log into the FTC website and take a closer look at this study…and I’m glad I did.

We can see all the data points they studied using current mortgage disclosures and their “new” prototype mortgage disclosures with the associated percentages. Clearly the new disclosures did better than the current mortgage disclosures.

I learned in graduate school all about conducting human studies, non-biased interview question creation, human sample size requirements and controls, and how any one of these factors done poorly renders the entire study skewed so badly one can’t draw any statistically significant conclusions from the study.

So here are some of the many the problems I have with the study after reading their methodology and constructs:

1. Sample size on both parts of this 2 part study are woefully low. They used an “intensive interview of 36 mortgage consumers in one part and 819 telephone respondents” for what can only be called a less intensive interview.

Any researcher will tell you asking 36 folks anything won’t yield any usable information. Bad luck could have supplied you with the 36 dumbest mortgage clients in the world. Plus all 36 were from the same county in Maryland…hardly a cross section of the country. Why bother doing a study with a sample size as low as 36?

2. They mixed prime and subprime clients 50/50. Everyone knows subprime clients aren’t as sophisticated as prime borrowers. So the subprime clients will drag all results down the curve. Any 8th grade math student knows taking someone who knows nothing (0 right answers…analogous to our subprime respondents) and averaging it with someone who knows everything (100% right answers…analogous to our prime respondents), yields a number that makes it look like everyone knows half the answers (50% right answers). Mathematically correct but statistically inconclusive, due to the fact that both these sub-samples should not be studied together in the first place. Badly designed studies yield no usable conclusions.

3. Comparing one set of documents to another can easily be biased depending on how the interviewers asked the questions. For example, if I ask you on the current documents, “Show me the loan amount”. You point to the wrong number. I correct you by showing you the right number. Now I switch to the “new” disclosure form and ask you for the same thing, you’ll get it right since your remember the number, not because the new disclosure is easier to understand.

We don’t really know how much interviewer bias was built into the methodology, but given the poor sample size and demographic controls, I’d guess way too much.

As a Mortgage Insider reader, you’ve come here to get the truth…and the truth about mortgage disclosures is the FTC study can’t be trusted, quoted, or believed in any way, shape, or form. The Washington Post and the LA Times should know better.

Did the FTC have a good intention for doing the study and the national newspapers for reporting it?

Sure.

But as the old adage says, “The road to Hell is paved with good intentions.”

Good Luck

PS: Using an ethical mortgage provider is the real solution to deceptive advertisers. The Mortgage Advantage gives you a step-by-step method to do just that…click the link to learn more.

Author: Rob K. Blake
Published June 26, 2007

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