What Credit Crunch?
Friday, August 24, 2007
On AOL.com this week, the Internet-based loan company LendingTree offered "Bad credit options" and a $425,000 loan for only $1,376 a month. And Countrywide Financial, the nation's largest mortgage lender, declared, "Bad Credit? Call Today. Refinance or Tap into Your Home's Equity" in an online ad from its Full Spectrum Lending Division.
No-money-down mortgages and subprime loans that cater to people with spotty credit are quickly disappearing as lenders tighten their standards in response to a rise in foreclosures. But you wouldn't know that if you looked at the ads that some banks and loan companies have placed on the Internet and in newspapers, including this one, often right next to the very stories chronicling the meltdown in the mortgage industry. So what's with the mixed messages?
"It's been a common feature of advertising," said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. "They offer their products not around interest rates but among monthly payments, ease of access, among 'you're more likely to get a yes with us than with others.' I don't think that has changed in this environment."
Even though dozens of lenders have shut down their mortgage operations or laid off employees, many others are trying to generate interest among potential borrowers even if the companies ultimately cannot qualify them for loans.
"It's important to point out that there are loan options available for borrowers with lower credit scores in today's market," Darren Beck, senior vice president of marketing for LendingTree.com, said in a written response to questions.
So is it wrong to market no-money-down, interest-only or other alternative mortgages to people with poor credit?
"There's nothing necessarily wrong about lending money to people with bad credit," said David Nahmias, U.S. attorney for the northern district of Georgia, who has worked on mortgage fraud cases. "Our concern is more the independent mortgage brokers who will try either to trick people into purchasing properties they really can't afford, solicit those people to lie, let them use their identity or credit so they can perpetrate mortgage fraud."
The Federal Trade Commission has investigated lending institutions for being misleading. For example, offering low rates without disclosing that the rates increase after a certain period of time, or offering loans that do not exist would violate federal laws, said Peggy Twohig, associate director for the division of financial practices at the FTC.
Twohig said the agency is monitoring mortgage-related ads and recently spotted some that were of concern, but she declined to name the companies. "It depends on exactly what they say, how they say it, how big and bold things are titled, what they try to hide in the small print," she said.
Mike Larson, a real estate analyst for Weiss Research in Jupiter, Fla., said that "the nicest" way to describe these companies is that they are "optimists," adding, "Even if they get a customer in the door this way, it's going to be a lot harder to qualify that customer than it was six months ago."
Many big lenders were able to make home loans by packaging them into bonds and selling them to investors. Now, the investors don't want to buy these bonds because they consider them risky.
So if you want a no-money-down mortgage, you're going to have a hard time getting one even if you have good credit. And if you want some of the low rates that the ads quote -- Home Loan Trust, for instance, said it could find "Rates As Low As 2.9%" though it acknowledged in the fine print that the rate could change-- you better have stellar credit. If you have bad credit, your options are going to be far more limited now.
Consumer advocates advise borrowers to be skeptical.
"The advertisement component has been such a big part of their entire business model," Kirsten Keefe, founding director of Americans for Fairness in Lending, an umbrella group for consumer groups, said of the loan companies. "It's been part of the bigger picture of helping people take out loans extremely advantageous to lenders and disadvantageous to the borrowers."
Much of the advertising is coming from Internet companies such as LendingTree.com, LowerMyBills.com and HomeLoanTrust.com that do not make loans but send borrowers' financial information to lenders and brokers.
Some lenders, too, are advertising to risky borrowers or offering risky products.
Take Countrywide. Last week, the company announced it had to use an entire $11.5 billion line of credit to fund its loans, and this week it laid off employees from its Full Spectrum Lending unit, which mostly handles customers who have minor credit problems or who cannot fully document their income.
Yet, in an AOL.com ad this week, it said, "We make it easy!" to get "Loans for homeowners with credit problems."
Asked about the ad, a spokeswoman e-mailed a statement saying: "Countrywide operates a highly-sophisticated marketing system for both on- and off-line advertising with a wide variety of marketing messages available to the broad array of customers that the company's products and services are designed to assist. The company monitors and adjusts advertisements to help ensure that the leads generated are likely to be within our underwriting parameters."
In an ad in The Washington Post, Navy Federal Credit Union offered "100% financing* up to $850,000" even though no-money down mortgages have become more difficult to get. Mary McDuffie, executive vice president of lending, said the credit union had not offered programs tailored to subprime borrowers, such as adjustable-rate mortgages with low introductory rates. Only Department of the Navy personnel and contractors who are members of the credit union are eligible for loans. No-money-down mortgages are often the only way they can afford homes, she said.
"Many of our members by the nature of being in the military and moving around, they need all that funding," she said. "It's always been a fully documented loan and it continues to be."
LendGo.com, another Internet company that sends information to lenders, declared: "Bad Credit OK!" in an ad on Time magazine's Web site. "Refinance Rates at 5.8% Fixed!" the ad said earlier this week.
But in an interview, Cyrus Zahabian, a manager at the California company, said, "We don't necessarily target those types of people. We look for more of the prime and Alt-A type credit here." Alt-A borrowers are in between prime and subprime.
He also acknowledged that it would be a challenge for a person with bad credit to get a rate as low as 5.8 percent. "Yeah, I don't have anybody that would offer a good rate for those types of people," he said.