According to a recent article at
American Banker, Bank of America is using questionable advertising materials to advertise
refinance packages to consumers.
From the article:
The ad compared the borrower's current mortgage payment on a 20-year
fixed-rate loan with an interest rate of 4% to B of A's "new
loan program" that offers a 30-year fixed-rate at 3.75%. B of A showed
a breakdown in which the borrower would be paying two points on the new
loan, adding an estimated $8,977 in fees and closing costs. That would
increase the overall interest rate to 4.1%, excluding taxes and insurance.
So how does this ad actually
sell a loan? It does it by focusing on the monthly payment, not the cost over
time. Even though the loan has an actual interest rate that is much higher
than advertised (thanks to points and fees), the monthly payment is still
lower due to the 30-year term of the loan.
American Banker refers to this tactic as reminiscient of the bubble era.
In the context of the article, the author means that the ad copy itself
seems a bit predatory -- it does remind me of the borrowers who took out
abusive ARM loans because their broker assured them that they could refinance
to a fixed rate before the adjustments started.
I think this ad copy is also a great example of the bubble-era mentality.
Lenders weren't very concerned with the long-term health of the loans
that they were issuing. So long as the loan remained stable long enough
to sell it on the secondary market, there was no reason to worry about
whether a borrower would default in 5 years when the interest rate adjusted upwards.
This short-term profit mentality is part of what got us into this mess
in the first place. Our consumer culture is filled with financial products
that allow us to get what we want right now, but pay a higher price in
the long run. In some cases (cars, homes), these investments make sense
because most people cannot afford to pay cash for such purchases. However,
when we look at buying consumer goods on credit, the picture is much different.
The same goes for this Bank of America advertisement. There are plenty
of downsides to the deal being offered. A 30-year mortgage means that
the home will gain equity slower than in a 20-year mortgage because the
payments are spread out further. That does not accout for the actual method
used to apply the payments, which could very well be interest first.
But the ad is not designed to make the consumer consider the long-term
ramifications of the loan product being offered. Instead, it is geared
towards the "save money now" crowd. Extra cash now means that
you can buy more things in the short term. That extra cash, however, is
going to cost money in the long-term. Is this a loan that is designed
to fail? Probably not. However, the same short-sighted logic that caused
the last mortgage bubble is present in the pitch.