How Second Mortgages Were Marketed as Home Equities and Captured America's Hearts and Minds

Over the last twenty years, financial companies have marketed second mortgages as home equity loans and lines and made it acceptable to borrow against your house. Consumers eagerly gobbled them up.

Have you taken out a home equity line or loan?  If so, you've joined millions of others who have borrowed against their home's values.  As the NY Times reports, over the last twenty years, home equity lines and loans have exploded in popularity:

"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."

Unfortunately, with home prices falling and the economy softening, all of this debt is hurting many households.

"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.

None of this would have been possible without a conscious effort by lenders, who have spent billions of dollars in advertising to change the language of home loans and with it Americans’ attitudes toward debt."

I worked at a large bank in the mid-2000s and remember the marketing maching that was put together to push these products out the door.  Banks consciously targeted consumers, changing the name of the product from second mortage to home equity to make it more palpatable to consumers.  There were television commercials, sophisticated direct mail programs, credit scoring, and all kinds of programs to sell and cross-sell home equities to as many customers as possible.

That being said, the banks never lied about the product.  Consumers knew what they were getting themselves into and really didn't care about the risks.  When the bank tried to provide customers with financial guidance and education on debt management, most consumers were only mildly interested .  Many of my friends eagerly opened home equity lines and loans, seeing it as found money.  So, who's to blame?  The banks who pushed the product, or the consumers who eagerly gobbled it up?

The Times article quotes Sendhil Mullainathan, an economist at Harvard who has studied persuasion in financial advertising as saying:

“It’s very difficult for one advertiser to come to you and change your perspective.  But as it becomes socially acceptable for everyone to accumulate debt, everyone does.”

I personally think that as the government racked up billion dollar deficits throughout the 80s and 90s, the concept of fiscal prudence and responsibility went out the door.  Home owners who were once accustomed to paying down their mortgage now saw it as a source of borrowing power and like the government, tapped that source.  Banks were only too eager to jump upon the bandwagon and fan the flames with some advertising lighter fluid.

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