Assessing the Impact of Financial Disclosure Forms on the Mortgage Selection Process

Education and Human Ecology: 3rd Place (The Ohio State University Edward F. Hayes Graduate Research Forum)The recent housing crisis has raised the important question of whether consumers are making appropriate decisions when it comes to various mortgage options. Specifically, do consumers know when to choose an adjustable rate mortgage versus a fixed rate mortgage? Further, does additional mortgage disclosure help consumers make the correct decision? This study uses unique data in a 2x2 experimental design in which some participants were randomly assigned to receive a Federal Reserve Board document containing information explaining the difference between these two major mortgage types. Participants were then given two distinct scenarios, one where an adjustable and one where a fixed rate mortgage is more appropriate. Path analysis is used to determine the probability of consumers making the correct decision in both scenarios. The results suggest that receiving a mortgage information disclosure document does indeed make a difference in consumers selecting the most appropriate mortgage type. 23% of those who did not receive mortgage information correctly chose the most appropriate mortgage for both scenarios while 36% correctly answered both after receiving the mortgage education information, a 57% increase. Factors such as overall financial knowledge and Truth in Lending Act comprehension are also important predictors of choosing the correct mortgage type. Not all consumers who were exposed to financial information made the correct decision which supports the continued use of mortgage counselors and or educational programs to further assist consumers in selection the best mortgage type for their situation.A five-year embargo was granted for this item