Refinance pitches in sub-prime tone
“Congratulations!” Irvine mortgage brokerage Sunwest Lending Group wrote in a recent mailing to a Sherman Oaks homeowner.
“You have been selected to substantially reduce your mortgage payment,” the flier says, dangling a monthly payment of only $1,190 based on a 1% interest rate. Buried in the fine print is the disclosure that paying the temptingly low amount would actually increase the homeowner’s loan balance.
Despite the mortgage meltdown, the blizzard of advertising for home loans continues. With the sub-prime market in tatters in the wake of record defaults and foreclosures, fewer pitches scream “Bad credit? No problem!” Instead, lenders struggling to remain profitable now are targeting people who have good credit and plenty of home equity.
With fewer homes being sold these days -- and therefore fewer loans taken out to finance purchases -- it’s only logical that the mortgage firms that survived the sub-prime shakeout are focusing their marketing on getting homeowners to refinance.
The lenders promote refinancing as a flexible tool, saying that, among other things, it can reduce bills by lowering interest rates and stretching out payments. But critics say the offers often appeal to the same inclination that led many sub-prime borrowers astray -- the tendency of people to live beyond their means by using their home equity as an ATM.
“It’s all the art of distraction,” said Bruce D. Miller, chief executive of Dailey & Associates Advertising in West Hollywood. “For some people, all they care about is the monthly payment. And that keeps them from digging in and concentrating on the hidden elements.”
The Federal Trade Commission sent warning letters last month to 200 lenders, brokers and other mortgage-market participants about ads the agency considered misleading.
The most problematic mortgage pitches are those that tout low interest rates or payments but play down the fact that they are temporary, or don’t disclose it at all, FTC senior attorney Lucy Morris said.
Countrywide Financial Corp., the nation’s largest mortgage lender, regularly barrages existing customers with pitches for new loans, encouraging them to cash out some of their home equity and saying they may not need to get an appraisal or prove their income. The company has a lot of customers to sell to because it handles the servicing -- sending bills, collecting payments and sometimes foreclosing on property -- for 1 of every 7 mortgages in the United States.
David Sambol, Countrywide’s president, told financial analysts Friday that despite recent turmoil the “longer term” outlook for the mortgage industry was good, in part because the cash-out refinancing business was so promising.
“There remains a very large stock of home equity that has not yet been tapped -- greater than $10 trillion -- which can be tapped to finance home improvements and other expenditures, such as education investment, small-business development and retirement spending,” Sambol said.
Countrywide’s computers seem to fine-tune its offers based on home prices, said a homeowner in the Los Angeles area who has a Countrywide mortgage amounting to 20% of his house’s value. Last year, Countrywide was advising him that he could cash out more than $600,000; the latest pitches have dropped to the low-$500,000 range, reflecting the flagging fortunes of the housing market.
The pitches said refinancing “may increase the total number of monthly payments and the total amount paid,” but didn’t say how expensive such a cash-out could be. Paying off an extra $500,000 at a fixed rate of 7% over 30 years would require monthly payments of $3,327.
What’s more, with home prices falling, borrowers who convert some of their home equity into cash may find themselves in a difficult position if they want to sell or refinance down the road, said Paul Leonard, California director of the nonprofit Center for Responsible Lending.
“One of the lessons of the last few months is that people need to be wary about spending accumulated equity that may not be permanent,” he said. “Some of the price appreciation we’ve seen, especially here in California, appears to be evaporating now that prices are declining.”
Calabasas-based Countrywide, which declined several requests to discuss its loan marketing, has been stepping up its advertising even as the industry’s troubles have cut into its bottom line. In the first six months of 2007, Countrywide’s earnings tumbled 35% to $919 million. But its spending on ads and promotions jumped 19% to $150 million.
For Countrywide, the need to goose loan volume is clear. The company said it made 44% fewer loans last month than in September 2006.
If Countrywide’s aggressive marketing has left its better customers feeling as if they were being pursued by sub-prime salespeople, it may be because they’re being pursued by former sub-prime salespeople.
When Countrywide said last month that it would all but stop making sub-prime loans -- and lay off as many as 12,000 people, or about 20% of its staff -- some employees of its Full Spectrum Lending division, whose core business was sub-prime refinancing, stayed on.
The reason, Countrywide Chairman and Chief Executive Angelo Mozilo said in a letter to employees, was that 75% of the mortgages originated by Full Spectrum this year have been “prime” mortgages -- loans to people with good credit.
“This division will now focus primarily on direct-to-consumer marketing channels such as direct mail, the Internet and other media advertising,” Mozilo told investors at a recent conference in San Francisco. He added that the $1.5-trillion portfolio of mortgages for which Countrywide collects payments provides “an enormous touch-point capability that can be monetized in many ways.”
Certainly prominent among those ways is refinancing -- replacing one loan with another. For homeowners, the motivation to refinance varies. Some do it to lower their monthly payments or to cut the term of their loans. But others refinance so they can borrow more and spend the extra cash -- or use it to pay off high-rate credit card debt.
In the current refinancing push, lenders are promoting some of the same exotic products that gained notoriety during the housing boom. Those include “pay option” adjustable-rate mortgages, the kind being pitched by Irvine-based Sunwest, which allow borrowers to pay less than the full interest as payments come due.
This type of loan is tricky for homeowners because the unpaid amount is added to the loan balance, which then rises instead of falling as payments are made. If the balance goes up by a specified amount -- for example, 15% above the starting balance -- the borrower must start paying enough to retire the debt on a regular schedule. That can mean an unmanageable increase in the borrower’s monthly payment.
One specialist in pay-option loans with adjustable rates is Charlotte, N.C.-based Wachovia Corp., the country’s fourth-largest bank. Wachovia got into the business by acquiring Oakland-based World Savings, which was known for successfully managing the risks of these so-called option ARMs.
David Pope, chief operating officer of Wachovia’s mortgage subsidiary, said making the lowest payment could be a good deal for borrowers if they used the money to achieve a financial goal, such as making a retirement contribution that an employer would match. When Wachovia markets option ARMs by direct mail, he said, “we work to be responsible in terms of what we’re sending out.”
But, Pope added, “we can’t monitor everything sent out by every mortgage broker” selling Wachovia loans to potential borrowers.
Sunwest’s president and co-owner, Jason Hayes Evans, didn’t respond to requests to discuss his company’s mailings. But a salesman at Sunwest, describing it as staffed by capable mortgage veterans who survived the industry shakeout, said everyone at the brokerage took pains to carefully explain to borrowers the risks as well as the benefits of option ARMs.
The salesman, who asked not to be identified because he wasn’t authorized to speak for Sunwest, said the company provided option-ARM loans from several companies, including Wachovia, that keep the loans as investments rather than sell them.
Sunwest considered disclosing more about pay-option perils in its two-page mailings, the salesman said. “But that would have taken up too much space. You’d need four pages to cover everything.” The firm instead relies on explanations by its employees, he said.
The option ARM that allows payments based on a 1% interest rate is intended only for people who have at least 30% home equity, have lived in the home for three years or more and have solidly prime credit scores of 700 and up, the Sunwest salesman said.
Good candidates for such loans, he added, include salespeople living on commissions that vary month to month or people nearing retirement who have more than 50% equity in their homes and know for sure that they will sell their properties when they downsize in a few years.
Of course, the salesman acknowledged, many borrowers at all income levels are attracted to the option ARM because they have let their personal spending get so out of control that the low payment is the only one they can afford.
“Newport Beach, where everyone is driving a Mercedes and the homes start at $1 million, is like an old western movie set,” he said, describing the finances of many wealthy homeowners as precarious. “It’s all just a front, with stilts holding it up.”
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Exciting sales pitches!
Mortgage giant Countrywide Financial Corp., whose loan volume is down sharply in the wake of the housing downturn and the sub-prime meltdown, is aggressively trying to get its customers to refinance. Here are excerpts from two pitches the company sent recently to homeowners:
Exciting news -- we are now offering a Special Online Rate Discount. . . . If you qualify, you could get up to $511,006 to pay off credit cards and other loans.
-- Countrywide e-mail
No need to show bank statements or verify other assets . . . no paycheck stubs or proof of income required . . . no new appraisal needed (in most cases).
-- Countrywide flier
Source: Times research
Home loan tips
If you are sent an ad for a mortgage, beware of phrases like these:
Low fixed rate!
The rate may last for as little as 30 days.
Very low rates!
Making payments based on such low rates may cause your loan balance to rise or force you to make a “balloon payment” at the end of the mortgage’s term.
Important information about your loan from XYZ Capital!
Another company may have obtained your lender’s name and your loan amount from public records. Read the fine print to see whether the letter is really from your mortgage company.
Questions to ask
* What is the loan’s annual percentage rate? (Experts say the APR is the best way to compare loans because it includes extra costs such as “points” and processing fees.)
* How much will your monthly payment be for each month of the loan?
* When can the payment increase and by how much?
* Does the monthly payment include amounts to pay your property taxes and homeowner’s insurance premium?
* How long is the loan’s term -- 30 years, 15 years or something else?
* Will the mortgage be paid off at the end of the term, or will there be a balloon payment?
* Is there a penalty -- an extra amount you must pay -- if you pay off the loan early by refinancing or selling your home?
* If there is a provision for a “prepayment” penalty, how long will it be in effect? If there’s an initial “teaser” rate, can you refinance without a penalty before your interest rate and payments go up?
For more information
Click on Mortgages/Real Estate for loan shopping tips.
Click on Mortgages for a list of consumer publications and other information, including a handbook about adjustable-rate mortgages and foreclosure-related links.
Source: Federal Trade Commission