Yes, We Have No Plain Vanillla

The plain vanilla mortgage, once a stunning bit of common sense that has emerged in a sea of financial obfuscation, is now a policy proposal of the past.

Barney Frank dropped the Obama Administration’s plain vanilla language in the Consumer Financial Protection Act Tuesday.

Many writers, approaching this issue from a behavioral economics perspective, saw a lot of merit to this idea.  Richard Thaler, who studies how people make financial decisions, called it “mortgages made easy.”The logic of his viewpoints are neatly expressed in this New York Times editorial:

Real people have trouble balancing their checkbooks, much less calculating how much they need to save for retirement; they sometimes binge on food, drink or high-definition televisions. They are more like Homer Simpson than Mr. Spock. Call them Homer economicus if you like, or just Humans. Behavioral economics is the study of Humans in markets.

Thaler has a good point.  If the previous administration’s preference in economics ran through Stanford and George Mason, then it is behavioral economists like Thaler who have the ear of the Obama crowd.  Their wisdom makes a lot of sense when you refer to what kind of information exists with most financial transactions.

Indeed, disclosures on loans exist in a murky world where complexity is balanced against disclosure laws.  The Truth in Lending Act mandates straightforward and uniform calculations of APRs on mortgage documents.  At the same time, anyone who has ever closed on a home loan will remember that there are still multiple pages of legalese that attended to their documents.

Plain vanilla would have been a simple alternative to that.  Now, those disclosure essayists still won’t have have had to learn to use a simple declarative sentence.  They can still string together 30-word clauses, one after another.  It  means would only have meant that there will would have to be one mortgage product where that language is uniform across the market.

If the language is complex, but uniform, then consumers can respond with different behavior.  They can enter the market with more certainty about their decisions.  Right now, a person doesn’t feel that it is necessary to understand chemistry to take an aspirin, or dairy farming in order to eat a yoghurt.  You might be aided by a graduate-level English degree, some knowledge of consumer protection law, and an advanced degree in math if you want to fully grasp your mortgage.

Ah, but changing that would have been too easy. Or rather, giving consumers the option to make a choice for certainty, but not requiring it, would have been too easy.

Barney – Cheers for doing your best to make it harder!

The decision may not be final, although Barney Frank-whisperers might feel confident.  Timothy Geithner will testify this morning on behalf of the CFPA. However, as of noon, Geithner is delivering a message on Capitol Hill that expresses the notion that the Administration has dropped its effort for plain vanilla mortgages as well as for similar credit card products.

Some of those Frank-whisperers might be his leading sources of campaign cash.  While there are no records of extensive donations from any consumer advocacy groups, he still raised over $2.2 million for his 2008 House of Representative campaign.  That is a lot considering that his seat in Massachusetts is effectively uncontested.  Who are those generous contributors?  Well, it wouldn’t be suprrising to find that the top five are all from the finance sector.  They include Bank of America, Morgan Stanley, JP Morgan Chase, Royal Bank of Scotland, and Brown Brothers Harriman (investment banking).  The American Bankers Association is there, too.  So are Deloitte and Touche, the National Association of Realtors, and a few leading insurance firms.

Losing Plain Vanilla is a shame.  Banks often support financial literacy, but they insist that consumers wade through cuneiform in order to buy a house.  Isnt’ there an easier way?