FTC cracking down on deceptive mortgage ads

John W. Schoen Senior Producer • Profile • E-mail

Deborah Banigan of Pleasanton, Calif., considers herself a relatively experienced consumer, having bought, sold and refinanced several homes over the past 18 years. Two years ago, she signed up for an adjustable-rate mortgage that gave her the option for a lower payment, which she expected to carry for a year or so before converting back to a fixed rate.

But this adjustable turned out to be one of the most volatile mortgages written during the housing boom — a so-called “Option ARM” that can reset much higher, and more rapidly, than more traditional ARMs. In Banigan’s case, her 4.25 percent starter rate has jumped to 7.88 percent.

“I recently reread the loan contract,” she said in a recent e-mail, “and nowhere did it ever state in clear dollars and cents what a fully amortized payment would be — even at the start rate. I never saw that amount until I received my first statement. … Had I fully understood what I do now, I could have made other choices.”

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That kind of disclosure — or lack thereof — is at the heart of an investigation announced Tuesday by the Federal Trade Commission, which has sent warning letters to more than 200 mortgage brokers, lenders and media outlets warning about “potentially deceptive” mortgage advertisements that may withhold information buyers need to understand the true cost of their home loans.

"Many mortgage advertisers are making potentially deceptive claims about incredibly low rates and payments, without telling consumers the whole story," said Lydia Parnes, director of the FTC's Bureau of Consumer Protection.

Those claims are central to an ongoing debate on Capitol Hill about whether the federal government should step in to help some borrowers now facing foreclosures who were the victims of predatory lending practices. On Monday, Sen. Charles Schumer, D-N.Y., proposed allowing two government-sponsored mortgage giants, Fannie Mae and Freddie Mac, to take a bigger share of the home loan market to help stabilize the troubled mortgage industry.

Opponents of these measures argue that borrowers should have known better than to take out loans they couldn’t afford. But many of those following the unraveling of the mortgage market say that at least some borrowers were duped by mortgage brokers or lenders who failed to properly disclose the full impact of adjustable loans with rapid and substantial “resets.”

“It absolutely is the responsibility of the lender to explain all the terms and conditions including the cost of the loan per month when the loan resets,” said David Berg, a Houston attorney involved in mortgage fraud cases. “From the evidence that we’ve gathered, it was rarely made clear.”

Many of subprime and other “exotic” mortgages that fueled the housing boom touted unconventional features like interest-only payments, lower "teaser" rates, and monthly payment options that involved “negative amortization” — which keeps initial monthly payments low by raising the total amount borrowed, only to create much bigger payments after the loan resets.

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