Academic journal article Academy of Marketing Studies Journal

Mortgage Marketing Practices and the U.S. Credit Crisis

Academic journal article Academy of Marketing Studies Journal

Mortgage Marketing Practices and the U.S. Credit Crisis

Article excerpt

INTRODUCTION

What role did mortgage marketing practices play in the U.S. credit crisis? Many people now regret their decisions to borrow money at non-traditional or subprime terms. Many have and will face the unpleasant and financially devastating prospect of losing their homes to foreclosure. What led to such widespread unhappiness among mortgage consumers? Was it the result of greedy lenders, deceptive loan originators, creators of mortgage-backed securities, and complacent investors? Or were consumers complicit with lenders in a market bubble fed by easy credit and a laissez-faire government?

This paper first argues that questionable marketing practices and selfish motives led to the mortgage credit crisis. Next, the paper presents arguments that lender practices were rational,

conducted with the best intensions, and often beneficial, yet became dysfunctional in the market environment of a real estate bubble that deflated. The arguments are summarized below.

Marketing practices led to the mortgage market meltdown:

* Greedy lenders preyed on unsophisticated and vulnerable borrowers.

* Aggressive lenders steered creditworthy borrowers into profitable but risky subprime loans.

* Lenders (and borrowers) committed fraud.

* The U.S. government failed to protect borrowers and encouraged loose lending standards.

* Loose lending standards destabilized the housing market. Market forces led to the mortgage market meltdown:

* Subprime lending is not the same as predatory lending.

* A few lenders behaved badly, but borrowers should have been more diligent.

* The credit crisis was prompted by market forces such as rising home prices and declining incomes.

* Government encouraged subprime lending as important source of mortgage funds for the poor.

MARKETING PRACTICES LED TO THE MORTGAGE MARKET MELTDOWN

Greedy lenders preyed on unsophisticated and vulnerable borrowers

According to ACORN, the Association of Community Organizations for Reform Now (ACORN, n.d.a), subprime lenders target low-income people, the elderly, and minorities. Lenders know that these people do not have many options to obtain funds for buying or refinancing a home. Desperate borrowers are vulnerable to the unscrupulous tactics of mortgage lenders.

Subprime borrowers often include people who are financially unsophisticated, and hence are easily misled. Prospective subprime borrowers often underestimate their ability to qualify for the prime market mortgages. And sometimes subprime prospects need cash immediately and accept inferior loan terms. Predatory lenders provide "misinformation, manipulates the borrower through aggressive sales tactics, and/or takes unfair advantage of the borrower's lack of information about the loan terms and their consequences." (HUD, n.d.). Several ways that subprime borrowers are exploited by predatory lenders are discussed next. Adjustable rates.

Subprime and Alternative-A (with a risk between prime and subprime) loans typically have an adjustable rate. Many borrowers are attracted by the initial low "teaser" rate. Some consider the teaser rate as being "inherently duplicitous" because borrowers are lured in by the low rate, only to see it increase dramatically when the rate adjusts over time (Rothschild, 2007). The lender often fails to explain the implications of other terms such as adjustable rates, negative amortization, and balloon payments. These terms may result in the borrower being unable to afford the payments or to refinance the loan in the future (ACORN, n.d.b).

Lack of income.

The lender may make an adjustable rate loan without considering whether or not the borrower can realistically repay the loan. People borrowed at an initial low rate to buy homes that they could not afford if the financed with a fixed-rate loan. "It now appears that many of them may not have fully understood the risks of these products, and lenders did not adequately evaluate their ability to make higher payments over the life of the loan" (FDIC, 2007). …

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