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Are Mortgages the New Credit Cards?

posted by Angie Littwin

Today, Harvard’s Joint Center for Housing Studies released two reports on understanding the home mortgage market.  One study, entitled “Mortgage Market Channels and Fair Lending:  An Analysis of HMDA Data,” explores the dramatic changes in the mortgage market over the course of the past two decades, including the rise of subprime lenders offering risk-based pricing.  The other report, “Understanding Mortgage Market Behavior:  Creating Good Mortgage Options for All Americans,” analyzes the cognitive and behavioral biases that limit consumers’ ability to compare different types of mortgage products in accordance with their own long-term preferences.  For example, the study explains how some consumers will have difficulty evaluating products such as adjustable-rate mortgages because many people face cognitive distortions when comparing short-term and long-term risks.  It also documents how, as the number and type of mortgage products have multiplied, choosing a mortgage has become breathtakingly complex. 

Both reports have several compelling findings, including some important analysis on racial and ethnic disparities in mortgage types.  But what fascinates me is how familiar this all sounds.  There is another industry frequently discussed on Credit Slips that has recently expanded into subprime territory, that is accused of playing on cognitive biases to induce customers to take out loans that are ultimately unaffordable, and that features contracts so complex law professors must work to understand them.  The good news is that we can use these similarities to cross-pollinate our ideas for improving both systems, adapting for the mortgage context ideas that were developed for credit card borrowing and applying mortgage reform proposals to credit cards.  The bad news is that there are now two ways for people to find themselves in unforeseen unmanageable debt.

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