Don't count on new law to save you

WASHINGTON - A little-known provision in the Housing and Economic Recovery Act, signed into law by President Bush recently, is supposed to help homebuyers understand how much debt they are taking on to purchase their home.

The law requires clear disclosure to ensure that borrowers know their maximum monthly payment based on the maximum interest rate allowed under the terms of their loan.

The legislation requires that lenders disclose the information to borrowers no later than seven days before closing so borrowers can shop around if they are not satisfied with the terms.

This is a good but not great provision of the law.

While it's good that borrowers will get more disclosure before signing their loan documents, the information may still be coming too late in the process. It's highly unlikely many borrowers will stop the process so close to closing even after getting this disclosure.

Part of the reason we're in this mortgage mess is that many borrowers naively believed what mortgage professionals were telling them and didn't verify the information or shop around for a better deal. Some applicants didn't carefully examine the loan documents that would weigh them down with hundreds of thousands of dollars in debt for decades to come. Others didn't question many of the fess they were charged.

"Financial rape happens every day," Carolyn Warren writes in her book "Mortgage Rip-Offs and Money Savers."

Since homes will continue to be sold and mortgages will be made, the take-away lesson from this crisis is to be better informed. And you can start by reading my pick for the Color of Money Book Club for August.

I've chosen "Mortgage Rip-Offs and Money Savers" ($17.95, John Wiley & Sons) because who is better to help you navigate the mortgage loan process than an insider who knows the many tricks and traps in the industry?

"Most homebuyers or people refinancing their loans know there are financial booby traps waiting, so they're on the lookout for scams and junk fees," Warren writes. "Nevertheless, they're still paying way too much."

For example, some lenders are trying to make up for less business these days by making more money per borrower through higher junk fees. "I'm seeing new junk fees and larger junk fees," said Warren, who now runs a business that reviews good-faith estimates to look for excessive charges.

Warren advises borrowers to watch for multiple fees that essentially cover the same service. She points to fees that are labeled as an "administration fee" or "underwriting fee." If a borrower asks enough questions they may find the fees - ranging from $800 to $1,200 in some cases - are often for the same thing. "It's like double dipping," she said. "There's no purpose for both these fees other than to pad profit."

Warren said a new fee she's seen recently is for documents sent by e-mail.

I don't think for a moment that, even with more disclosure and scrutiny, the mortgage industry is going to do better by borrowers. Potential homebuyers are going to have to be a lot savvier to avoid being taken advantage of. And yes, that means doing research, as simple as that advice sounds.

(c) 2008, Washington Post Writers Group