Let's take a look at what appears to be a prevalent method of mortgage advertising. While (apparently) not fraudulent, many ads that are designed to entice consumers are definitely misleading, and it seems, intentionally so. Some might say “predatory”. I have been paying particularly close attention to the ads of companies that advertise in South Florida, which is the region where I currently live. Once you are a little more attuned to what is happening with these kinds of ads you will know to disregard them, because you will see right through the nonsense. I'm guessing you will find the same kind of ads in any newspaper, because the bait-and-switch tactics are so widespread. These ads are not confined to newspapers. They are constantly aired on television and the radio, roadside billboards and the Internet. One common tactic is the listing of loan amounts with seemingly low corresponding payments. Sometimes there will be a big “1%” claim, and they might even call it a fixed rate, which is ridiculous. Very often there is no mention of the loan program, closing costs, whether there is a prepayment penalty, whether it is a true fixed rate or adjustable-rate mortgage (ARM), the Index and MARGIN if it is an ARM (which it is), etc. A disclaimer at the bottom of the print ads indicates something to this effect: “All information provided here is not guaranteed. Rates subject to change without notice. Overall APR 8.5% (Annual Percentage Rate disclosure is designed to be a way to determine the total cost of your loan, but because the calculation of APR is poorly standardized, lenders will vary in the way they disclose APR. Therefore, relying on APR comparisons can be counter-productive). Certain restrictions apply”. So what does all of the enticement really amount to? Nothing. They are just trying to get you to call and ask “How do I get me one of them 1% dealies?”. In fact, the ads often direct you to “call for details”; “Call for details” effectively means “never mind the ad”.
Case in point: A New York Times article from August 25, 2007 quotes Bryan Stapp, Chief Marketing Officer of Quicken Loans, as having said this: “While the advertising may've caused some to pick up the phone or go online, they still have to go through the process of talking to a banker. Anyone who was attracted to whatever advertising we had would then have a better picture of what program they would qualify for.” WOW! I re-read that thing seven times and I was still astonished. Seems to me to be a bait-and-switch, but what do I know? I'm a broker, not a regulator, legislator, or judge. Quicken, and other well-branded companies with large ad budgets, spend their money well. They know that a certain significant percentage of consumers will do business with them anyway, once they have gone to the trouble of making contact. It is, after all, a Numbers Game. By the way, it seems that attitude and approach has been working. Quicken Loans ramped up ad spending to $51 Million in 2006, from $3.5 Million in 2002, according to the article (by Louise Story and Vikas Bajaj). Through June, 2007 spending was on pace to pass 2006. The company wrote $18 Billion in loans last year, up from $4.6 Billion in 2001.
There are other enticement tactics you should be aware of. The free appraisal is common, and easy to offer. The promise is that your appraisal, which costs a few hundred dollars, will be credited back at closing. Which means if you don't close, tough luck. Another juicy one is no closing costs. This is a biggie. You know your closing costs are generally going to be several thousand dollars, so please know that if you are offered no closing costs that those costs will be built into the way your loan is structured. It is not a free lunch. Indeed, if it seems to good to be true, it probably is.
When you see the 1%-2% offers, this product is an Option ARM, or pick-a-pay, or MTA, or whatever they may be calling it. That low rate is the “start rate”, which is really a teaser rate. You may not pay any “points” and you may not even have any closing costs. The loan representative (LR) is being paid a Yield Spread Premium (YSP) based on the “margin” that is attached to your loan, and along with the index makes up your “fully indexed rate”. LR's like selling this product because borrowers seldom ask about the margin on their loan, and the higher the margin that is attached to your loan, the more commission that is generated. This particular form of selling and advertising is widespread and, I believe, a big contributor to the current mortgage mess. In another article I address the actual payment options available through this product, the prospect of “negative amortization”, and for whom this product may actually be appropriate.
Another tactic to be aware of is the use of advertising that is presented in the form of “news”. Below I have included an actual advertisement, word-for-word, that appeared as a “pop-up” when I went to retrieve my e-mail on August 19, 2007. The ad was by LowerMyBills.com, whose parent company is Experian, which is one of the credit bureaus that generates credit report scoring. As if the following advertisement is not bad enough in any environment, keep in mind that this “ad” is presented in the middle of a “mortgage meltdown” and “credit crunch”:
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FLORIDA MORTGAGE NEWS 8/19/07
Home Payments fall again! $510,000 mortgage for under $1498/month!
Think you pay too much for your mortgage? The sad news is, you probably are.
In fact, you may be paying more than your neighbors even though you live in the same neighborhood, and their house is identical to yours. Why should you pay more?
Find out what your lowest monthly payment could be .....
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HUH? We could have a long conversation about what is wrong with this ad, starting with the fact that it is not “News”. A better question is, can you tell me one thing that is right about this ad?
Regulators had better take a serious look at these methods if sustainable positive changes are to be effected in the mortgage industry.
Where is the Federal Trade Commission while all of this is going on? Currently the FTC is making overtures to be more attentive and get more involved in cracking down on this nonsense, which misinforms, misleads, and exploits consumers. But in large part, the FTC and mortgage industry regulators seem to be asleep at the wheel.
People must be very careful to understand the loan process and know how to identify a reputable loan representative, and thereby command Transparency, Full Disclosure, and Accountability.
