walkitout (walkitout) wrote,

interesting commentary on prepayment penalties

I've done some whining here about the things people sign up for in other-than-boring-old-fixed-rate-FHA-style loans (recourse vs. non-recourse, prepayment penalties, rapid changes in mortgage servicers due to repeated sales of the mortgage, loss of the ability to negotiate a workout because the mortgage has been bundled and sold to investors, etc. -- and that's not counting evils like negative amortization in Pick-a-Pay).

Here, Tanta, the other contributor to the Calculated Risk blog, presents an interesting take on prepayment penalties:


The gist is simple. Even ignoring issues of discrimination and lying (where people don't know what they are signing or don't know there are alternative choices), customers tend to assume the prepayment penalty won't be an issue for them (they don't plan to sell in this case) or that rare, negative events that change their plans won't happen to them (getting cancer, in this case).

Tanta's analysis is interesting, because she _doesn't_ agree with the rationale provided/implied by the victim, but absolutely opposes prepayment penalties because it's quite clear it is a component of the product that is misunderstood and misassessed by the customer.

I would extend this to all kinds of other situations deserving of regulation, but I recognize that everyone is going to draw the line somewhere. This, tho, seems like a pretty good one to ban.
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