Thursday, March 13, 2008

Fear Mongering Comes To Mortgage Commercials

Mortgage companies must be hurting for business right now because I was shocked at a commercial I heard on the radio this morning. In an attempt to get people to refinance their mortgages, it used fear-mongering tactics that would have made the President proud.

The ad started off by saying that private mortgage insurance, or PMI, is required on all loans where the loan to value ratio is greater than 80%. That's true. However, the ad then went on to talk about the declining housing market and how homes may now have lost equity. Your loan, the ad warned, may now be above an 80% LTV! Don't be hit with an added PMI charge on your mortgage - refi now!

First of all, there is truth in the statement that the housing market has declined and equity may have been lost, thus pushing your LTV over 80%. But, and this is the deceptive part, I have NEVER heard of any lender that regularly appraises the houses their mortgages are based on to make sure they stay above 80% LTV! Never! If the loan is being paid on time, no one at the bank is going to ask for a new appraisal. The ONLY time a new appraisal will be obtained is if the house is sold or the loan refinanced. In short, PMI will not suddenly be added to a mortgage that does not already include it, despite what the ad implies.

When you stop to think about this ad, it doesn't even make sense. If a loan truly did rise above 80% LTV due to falling home values, and the current loan did not have PMI, then refinancing it would only serve to ADD PMI, no matter what, because a new appraisal would be obtained, thus verifying the higher LTV.

3 comments: said...

Really good post!!! Mortgage companies ARE getting desperate. Title companies are, too. My favorite title company here in town told me they've had to do layoffs. And, I drove by a mortgage company I just referred to somebody not long ago--their doors are closed, the lights were off, and the sign was torn down!

But, being desperate is not an excuse for such a misleading commercial. You made an EXCELLENT point about having to re-appraise for a refi and finding that the owner will now have to pay PMI with the new loan--just what the commercial warns about.

Suzy T said...

That seems like it goes beyond fear mongering into outright fraud. Surely that can't be legal?

Shaun said...

A friend of mine who is in the mortgage brokerage business here in town said over 200 brokers have gone out of business in Phoenix alone with this latest housing downturn. She also said those were ones you didn't want to do business with anyway, so I suppose there is a good side to all this.

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