This study tested the accuracy of mortgage calculators made available to consumers as a common online financial tool by state and federally chartered banks with 1% or greater market share of FDIC insured bank deposits in the largest metropolitan-area in each of the 50 states.Three model client scenarios, Section 5 of the Federal Trade Commission Act and the Herfendahl-Hirschman Index of market concentration served as benchmarks. Defective calculators were found in all fifty states and they are not limited to banks.All Rent v. Buy calculators tested were defective.The defective calculators overstate the tax benefits of the mortgage interest deduction by more than 300% while failing to mention a tax benefit worth four times more, thus distorting mortgage affordability and suitability while highlighting the difficulty of distinguishing between marketing communications and objective mortgage advice.
Executive Summary
There are more than 10,000 Federal Deposit Insurance Corporation (FDIC) insured institutions (banks & saving institutions) in the United States and each year they are required to file a summary of their deposits. The Federal Deposit Insurance Corporation (FDIC) insured institutions annual Summary of Deposit survey was the primary source of secondary data used in this report.This report presents the findings of testing performed on mortgage calculators, specifically “Rent v. Buy” and “Save In Tax” mortgage calculators provided on and through websites of all state and federally chartered banks with a 1% or greater market share of FDIC insured bank deposits in the largest metropolitan-areas in each of the fifty (50) States.
Calculators that purport to calculate the tax savings in a standard rent versus buy decision were tested for accuracy using three different but consistent Model Client Scenarios as benchmarks.Although the bank websites usually posted a disclaimer regarding the accuracy and/or the applicability of the calculators to the user, due to a bank’s name and reputation a consumer may not discount the results entirely.Therefore, as a result of using these calculators, a consumer’s expectations about increased tax savings due to homeownership could influence a consumer’s view of both housing affordability and suitability.The report identifies all bank websites reviewed and details the findings for each.
During the study, it was found that many of the banks touted the conversion rate of capturing prospects and converting them into ‘interested and motivated’ mortgage applicants as a result of using these calculators. Therefore, unless it is disclosed to consumers that these calculators are mortgage-marketing tools, consumers may view the provision of mortgage calculators as a free and objective consumer service provided by the banks. Consequently, based on a belief that these calculators are reliable, a faulty mortgage calculator may play a role in consumers deciding to buy homes that, but for the inaccurate results of these calculators, they may have realized that they could not afford.To the extent that consumers initiate mortgage transactions due to these inaccurate mortgage calculators, it may fall under the Federal Trade Commission’s definition of an unfair and/or deceptive act and/or practice.Additionally, to the extent that faulty mortgage calculators distort a consumer’s view of housing affordability and suitability, these calculators could impact mortgage defaults, foreclosures and property tax collections.
The Herfendahl-Hirschman Index (HHI) of market concentration was used to measure and report the market share of those institutions in the largest metropolitan statistical area (MSA) in each state that provides access to faulty mortgage calculators. The HHI is the same tool the Federal Trade Commission (FTC) and Department of Justice (DOJ) use to interpret market data relative to market concentration.Transactions that raise the HHI by more than 100 points in concentrated markets presumptively raise antitrust concerns under the Horizontal Merger Guidelines issued by the DOJ and the FTC. The average and median post HHI, in this study, for all Metropolitan Statistical Areas rose by 3096 and 3015 points respectively, 30 times the guideline.In employing the HHI, this study treats a faulty mortgage calculator as the product being sold/or being made available by banks. However, the study recognizes that the banks may or may not be the creator of the faulty calculator, but the faulty calculator is accessible on or through bank websites. In order to get an idea of what the market share for faulty information looked like in each MSA, as it relates to the calculations in question, all-financial institutions that made a faulty calculator available on or through their websites were treated as if they merged.
The report confirms that predatory lending type practices are not limited to the sub-prime mortgage market as is generally believed. The Report also confirms that adults consistently demonstrate difficulty understanding basic financial concepts and have difficulty distinguishing the difference between financial-education and marketing communications. Testing of mortgage calculators promoted by or linked from entities such as the Government National Mortgage Association (GNMA, also known as Ginnie Mae), the Department of Housing and Urban Development, Federal Home Loan Mortgage Corporation (FHLMC, also known as Freddie Mac) and the U.S. Financial Literacy and Education Commission also uncovered surprising results that demonstrate an overwhelming need for mortgage advisors who are not only educated and competent but who are willing to have a fiduciary responsibility to the consumer.Some of these entities are quasi-governmental agencies, and the Financial Literacy and Education Commission was created to promote financial literacy; however, the mortgage calculators they provided or promoted were found to be unreliable.
The widespread nature of web access and the diverse demographic characteristics of those using one of these calculators would make it difficult to determine the full extent of any harm caused by their use and any such findings are beyond the scope of this study.
The report concludes that defective mortgage calculators overstate the tax benefits of the mortgage interest deduction, and thereby perpetuate a nationwide financial bias in that regard.Missing in all homeownership information reviewed is acknowledgement that homeownership has a quantifiable tax benefit even in the absence of a mortgage that is up to four (4) times greater than the mortgage interest deduction.Information regarding this seldom heard of benefit is put forth in this report and examples are provided as to how it should be quantified. The report demonstrates why this particular tax benefit should be a strategic consideration in any financial planning process.
