Marketing the debt culture: Remember when it was called a "second mortgage"?

Via Daily Sprawl, this New York Times article about how "second mortgages" became more benign-sounding "home equity loans," greatly encouraging the current unprecedented levels of debt among average Americans.

Live richly!

Home Equity Frenzy Was a Bank Ad Come True

By LOUISE STORY

“Live Richly.”

That catchy slogan, dreamed up by the Fallon Worldwide advertising agency, was pitched in 1999 to executives at Citicorp who were looking for a way to lure Americans to financial products like home equity loans. But some in the room did not like it. They worried the phrase would encourage people to live exorbitantly, says Stephen A. Cone, a top Citi marketer at the time.

Still, “Live Richly” won out. The advertising campaign, which cost some $1 billion from 2001 to 2006, urged people to lighten up about money and helped persuade hundreds of thousands of Citi customers to take out home equity loans — that is, to borrow against their homes. As one of the ads proclaimed: “There’s got to be at least $25,000 hidden in your house. We can help you find it.”

Not long ago, such loans, which used to be known as second mortgages, were considered the borrowing of last resort, to be avoided by all but people in dire financial straits. Today, these loans have become universally accepted, their image transformed by ubiquitous ad campaigns from banks.

Since the early 1980s, the value of home equity loans outstanding has ballooned to more than $1 trillion from $1 billion, and nearly a quarter of Americans with first mortgages have them. That explosive growth has been a boon for banks. Banks’ returns on fixed-rate home equity loans and lines of credit, which are the most popular, are 25 percent to 50 percent higher than returns on consumer loans over all, with much of that premium coming from relatively high fees.

However, what has been a highly lucrative business for banks has become a disaster for many borrowers, who are falling behind on their payments at near record levels and could lose their homes.

Read the rest HERE.

Comments

[J. Strupp]

"Since the early 1980s, the value of home equity loans outstanding has ballooned to more than $1 trillion from $1 billion, and nearly a quarter of Americans with first mortgages have them. That explosive growth has been a boon for banks."

They should re-write that last sentence so that it reads, "That explosive growth HAD been a boon for banks." Ask any banker how that "boon" is doing currently.

Anyways, second mortgages aren't the problem. I would even argue that second mortgages (given the low interest-rates of the last decade and the ability to roll them over to low-interest, fixed rate loans that pay interest AND principle) have saved families thousands of dollars per year. Keep in mind that 2nd mortgages allowed people to avoid the non-tax deductible "PMI" tax up until recently (this has now been changed). Money is cheap (relatively speaking) and responsible borrowers should take advantage of this fact.

Lastly, I always laugh when I read about the good ol' days when everyone put 20% down on a house, paid off their mortgage early and kept glass jars full of money buried in the backyard. This isn't the 1920's anymore and it's ridiculous to assume 20% down-payments will be the thing of the future. If you can afford the payments on a 2nd mortgage at around, say 7%, which is backed by the equity in your home AND you put that money towards improving an investment (your home, 2nd home, etc.) by all means do so and don't lose any sleep over it. Likewise, if a 2nd mortgage is the only way 1st-time home buyers can purchase a home (and the payments are affordable to the buyer obviously) then they are better off buying the home instead of renting. These facts have not changed even though the financial environment has.

Debt, believe it or not, isn't always a "four letter word" as the article wants you to believe.

[John Michlig]

I'm with you; as a sole proprietor, I HAVE to know how to manage debt.

HOWEVER, it seems to be quite a bit to ask the average middle class American:

"The portion of people who have home equity lines more than 30 days past due stands 55 percent above its average since the American Bankers Association began tracking it around 1990; delinquencies on home equity loans are 45 percent higher. Hundreds of thousands are delinquent, owing banks more than $10 billion on these loans, often on top of their first mortgages."

Can a home equity loan be leveraged wisely? Yes indeed. For the most part, are they? I'd have to say no.

[J. Strupp]

I would agree as well.

I just think that all too often these days, products like 2nd mortgages and home equity lines get a bad rap as if these products are the culprits of excessive consumer debt levels when, in fact, they have been very beneficial to thousands of Americans. This article sort of leans in that direction.