There’s no question the mortgage industry has changed dramatically since the beginning of 2007. Subprime mortgages are now as rare as gold, and credit requirements have become much stricter. Alt-A mortgages too are hard to come by. Many large mortgage providers have seen profits markedly down, and some have even closed their doors. And sadly, a lot of homeowners are now struggling to pay their adjustable-rate mortgages and keep their homes.
But no matter how much an environment changes, some things stay the same. Those outrageous advertisements offering unbelievable home loans are still being used by a minority of mortgages companies to draw in new customers, even as their previous customers are being foreclosed on because they were sold a loan they didn’t expect or understand.
The Ad Constant
Such ads are rarer than they were a year ago, because quite a few of the companies which depended on them for bringing in new business have moved on to more profitable industries or simply shut up shop. But they can still be found, lurking on websites big and small, and tempting desperate homeowners into taking the bait.
Fortunately, such ads are usually easy to detect. Many use interest rates or monthly payment amounts to snare and impress readers who might otherwise see little gain from such a product. More importantly, these ads use numbers which are ridiculously agreeable, and at face value seem to include very few requirements.
But promises of a $500,000 mortgage for a few hundred dollars a month should have you running the other way. Why? Because these kinds of loans are invariably driven by adjustable rates, depend on an astonishingly low teaser rate, and will result in a huge jump in minimum monthly payments once that teaser rate has expired after a year or two.
One way people determine whether an ad is shady or not is to scan for fine-print at the bottom of the promotional message. The assumption is that if there’s a lot of tiny conditional text there are catches, whereas no or very little fine-print means an honest deal.
But this assumption is seriously flawed. The nuances of advertising regulations allow advertisers to side-step the traditional checks and balances many people are used to. Look carefully at a mortgage advert on the web and you might see minimal fine-print like “some restrictions apply”. But the exact details of those restrictions aren’t given, at least not on the same page where the ad appears. Instead they’re buried at the bottom of the target page – the page you are taken to once you click on the advert itself.
Additionally, the final fine-print might not deal with the technical details of the loan as you would hope. Some only cover aspects like teaser rates and prepayment penalties in a vague and noncommittal way. Others don’t mention them at all.
One other important development in mortgage advertising is the use of the term “fixed rate”. Since the subprime shakeout, adjustable rate mortgages have become vilified and viewed as dangerous by many. Sometimes this reputation is unjust. But regardless, it has posed a problem to deceptive advertisers. Their solution has been to bend the truth about the product they’re offering and substitute “adjustable” for “fixed”. In their eyes the mortgage is fixed because the payments won’t change for the first year or so that the teaser rate is in place. But they deliberately don’t acknowledge that after the teaser rate has expired the payments will start shifting, often upwards.
New Trends, Same Old Risks
As the mortgage market has stuttered, law makers and industry leaders have stepped in to curb bad business practices. Teaser rates and prepayment penalties, which have been the undoing of many unsuspecting homeowners, are now frowned upon. And reports of dubious mortgage origination practices like exaggerated income statements or bait-and-switch offers are rigorously investigated.
Some argue that given these developments such questionable practices must no longer be possible. But sadly, they are. No matter how the mortgage climate changes there will always be companies who choose to use advertising in questionable ways. Worse still are the unscrupulous small-time opportunists who try to fly below the radar, or who operate to make a quick buck from unsuspecting customers and then slink away into the night.
Companies like America’s Lending Partners have tackled the problem of dubious ads head-on by trying to educate consumers that some mortgage ads can be harmful to their financial health. They placed an ad on their home page promising a $490,000 mortgage for only $99 per month. But when someone clicks on that ad they are told “Don’t Believe Everything You Read!”, and are warned as to the dangerous nature of such promotions. The strategy has yielded some interesting calls into their customer service department from small-time brokers and loan officers who had hoped to ensnare unsuspecting homeowners with an obviously toxic mortgage.
When shopping for something as major as a home loan it’s important you approach the process methodically. When it comes to advertising, don’t jump at numbers or be sold by a flashy message alone. Look at the fine-print and check the credentials of the company making the offer. Educate yourself and do your research. The time invested will probably save you thousands of dollars down the road.