How Second Mortgages Were Marketed as Home Equities and Captured America's Hearts and Minds
How Second Mortgages Were Marketed as Home Equities and Captured America's Hearts and Minds
Author:Sol Nasisi
on August 16, 2008
- modified on July 15, 2020
Over the last twenty years, financial companies have marketed second mortgages as home equity loans and lines and made it acceptable to borrow against your house. Consumers eagerly gobbled them up.
Have you taken out a home equity line or loan? If so, you've joined millions of others who have borrowed against their home's values. As the NY Times reports, over the last twenty years, home equity lines and loans have exploded in popularity:
"Since the early 1980s, the value of home equity loans outstanding has ballooned to more than $1 trillion from $1 billion, and nearly a quarter of Americans with first mortgages have them. That explosive growth has been a boon for banks. Banks’ returns on fixed-rate home equity loans and lines of credit, which are the most popular, are 25 percent to 50 percent higher than returns on consumer loans over all, with much of that premium coming from relatively high fees."
Unfortunately, with home prices falling and the economy softening, all of this debt is hurting many households.
"The portion of people who have home equity lines more than 30 days past due stands 55 percent above its average since the American Bankers Association began tracking it around 1990; delinquencies on home equity loans are 45 percent higher. Hundreds of thousands are delinquent, owing banks more than $10 billion on these loans, often on top of their first mortgages.
None of this would have been possible without a conscious effort by lenders, who have spent billions of dollars in advertising to change the language of home loans and with it Americans’ attitudes toward debt."
I worked at a large bank in the mid-2000s and remember the marketing machine that was put together to push these products out the door. Banks consciously targeted consumers, changing the name of the product from second mortgage to home equity to make it more palpable to consumers. There were television commercials, sophisticated direct mail programs, credit scoring, and all kinds of programs to sell and cross-sell home equities to as many customers as possible.
That being said, the banks never lied about the product. Consumers knew what they were getting themselves into and really didn't care about the risks. When the bank tried to provide customers with financial guidance and education on debt management, most consumers were only mildly interested . Many of my friends eagerly opened home equity lines and loans, seeing it as found money. So, who's to blame? The banks who pushed the product, or the consumers who eagerly gobbled it up?
The Times article quotes Sendhil Mullainathan, an economist at Harvard who has studied persuasion in financial advertising as saying:
“It’s very difficult for one advertiser to come to you and change your perspective. But as it becomes socially acceptable for everyone to accumulate debt, everyone does.”
I personally think that as the government racked up billion dollar deficits throughout the 80s and 90s, the concept of fiscal prudence and responsibility went out the door. Home owners who were once accustomed to paying down their mortgage now saw it as a source of borrowing power and like the government, tapped that source. Banks were only too eager to jump upon the bandwagon and fan the flames with some advertising lighter fluid.
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee
Available APRs range from 6.60% - 14.15*, which includes the payment of a higher origination fee in exchange for a reduced interest rate, which is not available to all applicants or in all states.(The advertised APR includes enrolling in autopay (0.25%) as well as payment of higher origination fee in exchange for a reduced rate, which is not available to all applicants or in all states). The lowest APRs are only available to the most qualified applicants, depending on credit profile and the state where the property is located, and those who also select five year loan terms; APRs will be higher for other applicants and those who select longer loan terms. Rates change frequently so your exact APR will depend on the date you apply. APRs for home equity lines of credit do not include costs other than interest. You will be responsible for an origination fee of up to 4.99% of your initial draw, depending on the state in which your property is located and your credit profile. You may also be responsible for paying the costs of valuation if an AVM is not available for your property ($180), manual notarization if your county doesn’t permit eNotary ($380), and recording fees ($0 - $315) and recording taxes, which vary by state and county ($0-$1,400 per one hundred thousand dollars borrowed). Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone. Consumers wishing to file a complaint against a mortgage company or a licensed residential mortgage loan originator should complete and send a complaint form to the Texas department of savings and mortgage lending, 2601 North Lamar, Suite 201, Austin, Texas 78705. Complaint forms and instructions may be obtained from the department’s website at www.sml.texas.gov. The department maintains a recovery fund to make payments of certain actual out of pocket damages sustained by borrowers caused by acts of licensed mortgage company.
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