mortgages

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Ironically, from a Japanese firm trying to sell mortgages. Cheaper mortgages, sure, but who wants one after watching these? There’s a theme.

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Assorted links

1) The behavioral economics explanation for why more poker hands played means less money won.

2) Waiters who compliment customers get three percent bigger tips, on average.

3) Why were adjustable-rate mortgage applications where so misleading during the housing bubble? Because lenders showed post-teaser interest rates that equaled the rates were at the date of the loan closing. In an era of cheap money, this disclosure made loans look really cheap.

4) A version of the Google Powermeter for your exercise and sleep schedule. Hat tip: Mary Zhu.

5) Are you a British Gas customer? Have you gotten EnergySmart yet? Hat tip: Lukasz Walasek.

6) Video of a U.K. panel on nudging.

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Richard Thaler recently asked why so few people have walked away from their mortgage. Today, the New York Times reported that more homeowners are thinking about it. They aren’t the only ones thinking about it. Banks are trying to figure out who is strategically defaulting.

Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.

“Banks are pulling credit reports to see if it’s a strategic default,” he said. “If you’re behind on all your other payments, you’re okay. But if you’re not, they’ll come after you.”

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In his latest Economic View column, Richard Thaler offers his thoughts on mortgage default rates and why homeowners stay underwater.

Much has been said about the high rate of home foreclosures, but the most interesting question may be this: Why is the mortgage default rate so low?

After all, millions of American homeowners are “underwater,” meaning that they owe more on their mortgages than their homes are worth. In Nevada, nearly two-thirds of homeowners are in this category. Yet most of them are dutifully continuing to pay their mortgages, despite substantial financial incentives for walking away from them.

A family that financed the entire purchase of a $600,000 home in 2006 could now find itself still owing most of that mortgage, even though the home is now worth only $300,000. The family could rent a similar home for much less than its monthly mortgage payment, saving thousands of dollars a year and hundreds of thousands over a decade.

Keep reading in the full column here.

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1) Should perspective home buyers be required to watch a video about the pain of foreclosure before they qualify for a mortgage? Draft a budget? Pass an exam about loans?

2) Stefan Wobben reports on deceptive marketing defaults online; one for RyanAir and another for the Wifi at the Amsterdamn airport.

3) NIH is looking to give two $7.5 million grants to investigate health care nudges. Application here. Hat tip: Dan Goldstein.

4) Extremeness aversion and Starbucks coffee.

5) Before credit cards were accepted in cabs, New York riders averaged a 10 percent tip. Now that cabs allow cards, tips have jumped to an average of 22 percent. Hat tip: Steven Shechter.

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In his inaugural Economic View column, Richard Thaler proposed plain vanilla mortgages as a nudge to protect some consumers from falling into the trap of buying more exotic mortgages with low teaser rates and other tempting payment plans. Last week, in an op-ed, Richard Posner questioned the value of such a product, and the new consumer financial protection agency that would be tasked with designing and implementing it, by pointing out the cognitive limitations of behavioral economists, government bureaucrats, and anyone else acting as a choice architect. Thaler has now responded (via Paul Solman of PBS):

The administration has not stipulated how many types of plain vanilla mortgages there would be, but the research on which this proposal is based makes it clear that it is reasonable to assume that there would be at least a fixed-rate and some type of adjustable-rate mortgage in the mix. (For my take on this proposal see my recent NYT column, linked above). Nonetheless, Posner writes as if there would be only one plain vanilla mortgage. This is seriously misleading. An analogy would be to say that we would not want the Consumer Product Safety Commission to regulate the production of cribs because they might decide only to allow pink cribs and some people might like blue ones. Of course the agency would not do that; it would only make sure that whatever color crib you bought would not kill your child.

Posner does not stop at mischaracterizing the proposal. He launches a second line of attack based on the following logic. 1) Behavioral economists such as Thaler have endorsed this plan. 2) Thaler has been known to make mistakes. 3) Therefore, he should not be in the business of helping consumers avoid mistakes. Of all the evidence readily available that I am not perfect, he concentrates on the fact that I have written about the well-known puzzle in economics that the difference in returns between equities and bonds (the “equity premium”) has, in the past, seemed to be too large. With the market now down, presumably he thinks this writing makes me look foolish. I plead guilty to joining the hundreds of other economists (most of whom are not behavioral economists) who have written about this historical puzzle. And, as Posner suggests, for many years I did advocate that young investors should consider putting all their money in stocks, and I followed that advice myself until 2000 when the level of the stock market bubble got so ridiculously high that I switched half of my retirement portfolio into treasury inflation-protected bonds (TIPS). But of course, I am not a perfect forecaster. I, like most people, did not get out of stocks last summer. And, I certainly plead guilty to being imperfect. For a long list of particulars, contact my wife.

Read Thaler’s full comments here.

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Richard Thaler has begun a regular rotation in the Sunday New York Times as an Economic View columnist. This past Sunday, he made the case for “plain vanilla” mortgages as the default option when buying a home.

Once upon a time, choosing a mortgage was easy. Nearly all mortgages were of the 30-year, fixed-rate variety, required a 20-percent down payment and were devoid of tricky features like balloon payments, teaser rates and prepayment penalties.

Sensible regulation was easy in this environment. Congress passed what’s known as the Truth in Lending Act, which required lenders to report interest rates in a uniform way, using the now-ubiquitous annual percentage rate. Picking the best mortgage was no more complicated that finding the lowest A.P.R.

Fast forward to 2008, and the world of mortgage shopping had become a much more complicated place.

Read the column here, and look for his columns in the future.

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Newsweek asks whether certain people are wired to make poor financial decisions by simplifying complex problems. A study by some cognitive neuroscientists suggests yes, and says this group contains many extroverts who are 1) optimistic about their lives and 2) impulsive.

In the past, however, these optimistic simplifiers would have been better off because mortgages and even credit card rules were simpler, says Richard Thaler, a behavioral economist at the University of Chicago and the coauthor of Nudge: Improving Decisions About Health, Wealth, and Happiness. In the late-’70s/early-’80s, when the 30-year, fixed-rate mortgage was pretty much the only loan option, a “rule of thumb” worked well: You looked for one number, the annual percentage rate, decided if you could afford it and then signed on the dotted line (or walked away). “Once mortgages got very, very complicated,” Thaler says, “doing the correct analysis required having a Ph.D. in economics”-and simplifying under those circumstances became dangerous.

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Over at the CL&P Blog, Jeff Sovern has more thoughts on nudges in mortgage agreements. (Earlier post is here.)

Suppose after stating the monthly payments, and especially the maximum payments under an adjustable mortgage, what would happen if the disclosure statement explicitly asked “Are you sure you can make these payments on time?  If you can’t, you may lost your home.” Or is that going from a nudge to an annoying nag–and if so, would that be bad? The late payment fee is already required to be in the “Federal Box” set of disclosures, and so won’t be far away from the statement of when payments are due, but the regulations could be amended to require that it be right next to the notice of when payments are due, just as with the credit card statement.

Before diving into the effects of one sentence’s construction or placement on a page, it’s worth stepping back for a minute. The point of Sovern’s comments, and other like them, is that clearer disclosure in the mortgage industry would be better. More disclosure would be nice too. More disclosure is one common refrain among mortgage industry reformers. And let’s not savage the government too much. Disclosure is an concept it has looked into. The question is what does better disclosure look like? To put the question another way: Should a mortgage, like a refrigerator, a car or even a box of cereal, come with a label? Is a label the best form of disclosure – as opposed to an Excel-style spreadsheet or a brief executive summary? The FTC has considered a hybrid of these two approaches already. See here for the prototype.

To Nudge blog readers: What information would you put on a mortgage label? How would you design it? Is the interest rate amount and structure the most important information? Perhaps conflicts of interest between broker and other parties?

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“Stop trying to turn everyone into a financial planner,” says Lauren Willis of Loyola Law School in Money Magazine. “Instead, try to get everyone to understand that the people selling you financial products often don’t have your best interests at heart.”

Q: What type of regulation do you think would work?

A: Sellers could be required to offer you a default product that is safe. Whenever you applied for a mortgage, for example, you would have to be offered a 30-year fixed amortizing loan.

Hat tip: Freakonomics.

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