Saturday, August 16, 2008

Setting The Debt Trap

“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.

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.

“Calling it a ‘second mortgage,’ that’s like hocking your house,” said Pei-Yuan Chia, a former vice chairman at Citicorp who oversaw the bank’s consumer business in the 1980s and 1990s. “But call it ‘equity access,’ and it sounds more innocent.”

Changing the Language

Many experts say the ads encouraged Americans to go deeper into debt.

“It’s very difficult for one advertiser to come to you and change your perspective,” said Sendhil Mullainathan, an economist at Harvard who has studied persuasion in financial advertising. “But as it becomes socially acceptable for everyone to accumulate debt, everyone does.” A spokesman for Citigroup said that the bank no longer runs the “Live Richly” campaign and that it no longer works with the advertising agency that created it.

Citi was far from alone with its simple but enticing ad slogans. Ads for banks and their home equity loans often portrayed borrowing against the roof over your head as an act of empowerment and entitlement. An ad in 2002 from Fleet, now a part of Bank of America, asked, “Is your mortgage squeezing your wallet? Squeeze back.” Another Fleet ad said: “The smartest place to borrow? Your place.”

One in 2006 from PNC Bank pictured a wheelbarrow and the line, the “easiest way to haul money out of your house.”

In 2003, one from Citigroup said a home could be “the ticket” to whatever “your heart desires.” It continued: “You’ve put a lot of work into your home. Isn’t it time for your home to return the favor?”

In 2004, Banco Popular said in its “Make Dreams Happen” ads: “Need Cash? Use Your Home.”

“Seize your someday,” a Wells Fargo ad advised in 2007.

It might seem hard to believe, but not long ago people borrowed money to buy a home with the expectation that they would eventually pay off the debt. A mortgage had a finish line. You mailed your check to the bank every month for 20 or 30 years, paying interest and principal, and bit by bit, at the end you owned your home free and clear.

The newly mortgage-free even used to throw mortgage-burning parties to celebrate their financial freedom. In 1975, Edith and Archie Bunker torched their mortgage on “All in the Family.” Two years later, the Walton family burned theirs on “The Waltons.”

Now the idea of paying off the mortgage and owning a home outright is disappearing. One reason is that many people make smaller down payments on homes than they once did, so it takes longer to pay off their debt.

But another reason is that banks now enable homeowners to keep borrowing. In fact, they encourage it. Little by little, millions of Americans surrendered equity in their homes in recent years as home prices seemed to rise inexorably from one peak to the next.

As a result, the United States has become a nation of half-home owners. For the first time since World War II, the portion of home value that Americans own has fallen to less than 50 percent. In the 1980s, that figure was 70 percent.

Bankers defend home equity loans by saying they merely give customers what they want: Easy credit to buy things that they otherwise might not be able to afford. Advertising executives say society’s attitudes about debt shaped the ads, not the other way around.

The phrase home equity loan has been around since at least the Depression, when it appeared in classified ads. But the transformation of the second mortgage into the home equity loan began in earnest in the 1970s and early 1980s.

That was when federal laws allowed mainstream banks to offer second mortgages as well as loans with interest-only, adjustable rates and so-called piggyback features combining first and second mortgages. Until then, such products were primarily marketed to lower-income customers by savings and loans and financing companies, like Beneficial and Household Finance.

Marketing executives knew that “second mortgage” had an unappealing ring. So they seized the idea of “home equity,” with its connotations of ownership and fairness. The phrase was also used for lines of credit, which are sometimes taken out by people who have already paid off their first mortgage.

But in the early 1980s, Americans were not very familiar with the concept of dipping into home equity. Charles Humm, the senior vice president for marketing and sales at Merrill Lynch Credit Corporation, had to go on a road show explaining the idea to potential customers.

He had to change the notion that only people in financial trouble took out a second mortgage, he recalls. Merrill wanted to sell second mortgages to consumers who did not need to borrow money urgently.

“The second mortgage category, then as probably now, suffered from a pretty bad reputation,” he said. “It generally tended to be a credit facility of last resort, and it was done by people in dire straits. That was not the audience we were after.”

The campaign worked. The amount of home equity loans outstanding grew from $1 billion in 1982 to $100 billion in 1988 — in part because a portion of the loans were tax deductible, as the ads often pointed out.

A Bank of New York ad in 1986, for instance, told homeowners who exploited those tax advantages they were “absolutely brilliant.”

An ad from CIT Financial, now struggling, said, “You don’t have to sell your home to get $10,000, $30,000 or even more in cash. You don’t even have to walk out the door.”

Citibank’s home equity ads portrayed housing as a revolving account similar to the plastic card in your wallet. One in the mid-’80s, for example, bragged: “Now, when the value of your home goes up, you can take credit for it.” Citigroup also used equity in its product name, calling the line an “Equity Source Account.”

A Different Approach

Advertising historians look back at the ’80s as the time when bank marketing came into its own. Citigroup led the way by hiring away advertising staff from packaged goods companies like General Mills and General Foods, where catchy ads were more common.

“Banking started using consumer advertising techniques more like a department store than like a bank,” said Barbara Lippert, an advertising critic for the magazine Adweek. “It was a real change in direction.”

Banks thought they were in safe territory. A Merrill Lynch executive, Thomas E. Capasse, told The New York Times in 1988 that home equity loans were safe because bankers believed that consumers would spend the money on wise investments and not “pledge the house to buy a blouse.”

Mr. Capasse worked in the bank’s division that was repackaging mortgage loans into bundles of loans to resell to investors, a practice that enabled lenders to make even more loans.

But other executives at Merrill were worried about the explosion of home equity lending. Mr. Humm, the marketing executive in Merrill’s credit division, said he was concerned about ads from other banks that suggested using home equity loans for family vacations, new pools and shopping jaunts.

“We thought it was an inappropriate use,” Mr. Humm said. “We thought it would bring to the equity access category the same kind of reputation over time that had come to the second mortgage category.”

Marketing executives who pushed the easy money slogans of the 1980s and 1990s now say their good intentions went awry.

Mauro Appezzato used to run marketing at The Money Store, now defunct, the lender whose longtime television spokesman was Phil Rizzuto, the former Yankees shortstop and announcer. In 1993, Mr. Appezzato helped come up with the pitch line “less than perfect credit,” a phrase he said was meant to refer to people whose credit was only slightly problematic.

But by the late 1990s, the phrase was co-opted by subprime lenders like Countrywide Financial, Washington Mutual, New Century and Ameriquest.

Ameriquest ran an ad in 2004 during the Super Bowl, one of the biggest advertising events of the year, that has come to symbolize the excesses of subprime lending. The ad showed a woman on an airplane climbing over the man sitting next to her to reach the aisle. The plane’s lights go off during turbulence and the woman slips, landing on the man’s lap. Other passengers gasp because it looks as if they were in a sexual embrace.

“Don’t Judge Too Quickly,” the ad said. “We Won’t.” Two and a half years later, Ameriquest went bankrupt.

Bank executives say that their customers wanted to borrow more money, and that desire is what drove changes in the marketplace. Consumers gave a resounding yes to offers of new credit, said Richard Kovacevich, the chairman of Wells Fargo, recalling questions he raised back in the 1980s when he oversaw retail banking at Citigroup.

“When you went to market research and asked people questions: would you like to have 24 by 7 access to your money? Would you like to have access to home mortgages and credit cards? Even if the product didn’t exist as such, would you like a line of credit where you can just write a check anytime?” Mr. Kovacevich said. “There’s no question, then, that that caused credit to enlarge.”

Still, Elizabeth Warren, a professor at Harvard Law School who has studied consumer debt and bankruptcy, said that financial companies used advertising to foster the idea that it is good, even smart, to borrow money.

“That ‘unused home equity in your house? Put it to work for you.’ ” Professor Warren said, mimicking the ads. “Doesn’t that sound financially sophisticated?” Not to Professor Warren. “Put it to work,” she said, is just a euphemism for borrowing.

Source - New York Times


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