@newspaperarticle {65381,
	title = {A One-Size-Fits-All Solution},
	year = {2007},
	month = {Dec 26, 2007},
	publisher = {New York Times},
	abstract = {While
the causes of the mortgage crisis are myriad, a central problem was
that many borrowers took out loans that they did not understand and
could not afford. Brokers and lenders offered loans that looked much
less expensive than they really were, because of low initial monthly
payments and hidden, costly features. Families
commonly make mistakes in taking out home mortgages because they are
misled by broker sales tactics, misunderstand the complicated terms and
financial tradeoffs in mortgages, wrongly forecast their own behavior
and misperceive their risks of borrowing. How many homeowners really
understand how the teaser rate, introductory rate and reset rate relate
to the London interbank offered rate plus some specified margin, or can
judge whether the prepayment penalty will offset the gains from the
teaser rate?  While disclosure alone is unlikely to help, there{\textquoteright}s
another option. In retirement policy, behavioral research has led
Congress to promote
{\textquotedblleft}opt out{\textquotedblright} plans under which employers sign workers up for retirement
benefits unless the worker chooses not to participate. This policy has
significantly improved people{\textquoteright}s retirement savings. Why not have an opt-out home mortgage plan, based, for
example, on a
30-year, fixed-rate loan, with sound underwriting and straightforward
terms?  Eligible borrowers would be offered a
standard mortgage (or set of mortgages) and that{\textquoteright}s the mortgage they
would get{\textemdash}unless they choose to opt out in favor of another option,
after honest and comprehensible disclosures from brokers or lenders
about the risks of the alternative mortgages. An opt-out mortgage
system would mean borrowers would be more likely to get straightforward
loans they could understand. But given lender
incentives to hide true costs from borrowers, we need to give the
opt-out plan some bite. Under our plan, lenders would have stronger
incentives to provide meaningful disclosures to those whom they
convince to opt out, because if default occurs when a borrower opts
out, the borrower could raise the lack of reasonable disclosure as a
defense to bankruptcy or foreclosure. If the court determined that the
disclosure would not effectively communicate the key terms and risks of
the mortgage to the typical borrower, the court could modify or rescind
the loan contract. This approach would allow
lenders to continue to develop new kinds of mortgages, but only when
they can explain them clearly to borrowers. To avoid the next mortgage
crisis, we should use behavioral insights to make it harder for lenders
to put borrowers where they will make predictable and consequential
mistakes. },
	url = {http://www.nytimes.com},
	author = {Mullainathan, Sendhil and Barr, Michael S. and Shafir, Eldar}
}
