Taking cash out of the home

More lenders beseech those who've built up equity to spend it

Mortgage peril

December 23, 2007|By E. Scott Reckard | E. Scott Reckard,Los Angeles Times

Despite the mortgage meltdown, the blizzard of advertising for home loans continues.

Fewer pitches scream "Bad credit? No problem!" Instead, lenders struggling to remain profitable are targeting people with good credit and plenty of home equity. Mortgage firms that have survived the subprime shakeout are focusing on persuading homeowners to refinance.

The lenders promote refinancing as a flexible tool to lower interest rates and stretch out payments. But critics say the offers often appeal to the same inclination that led many borrowers astray - the tendency of people to live beyond their means by using their home equity as an ATM.

"It's all the art of distraction," said Bruce Miller, chief executive of Dailey & Associates Advertising. "For some people, all they care about is the monthly payment. And that keeps them from digging in and concentrating on the hidden elements."

The Federal Trade Commission sent warning letters this year to 200 lenders, brokers and other mortgage-market participants about misleading ads.

The most problematic pitches are those that tout low interest rates or payments but play down the fact that they are temporary, or don't disclose it at all, FTC senior attorney Lucy Morris said.

Countrywide Financial Corp., the nation's largest mortgage lender, frequently sends customers pitches for new loans, encouraging them to cash out some of their home equity. The company has a lot of customers to sell to because it handles the servicing - sending bills, collecting payments and sometimes foreclosing on property - for 1 of every 7 mortgages in the United States.

David Sambol, Countrywide's president, told financial analysts recently that despite turmoil the longer-term outlook for the mortgage industry was good, in part because the cash-out refinancing business was so promising.

"There remains a very large stock of home equity that has not yet been tapped, greater than $10 trillion, which can be tapped to finance home improvements and other expenditures, such as education investment, small-business development and retirement spending," Sambol said.

But with home prices falling, borrowers who convert equity into cash may find themselves in a difficult position if they want to sell or refinance later, said Paul Leonard of the nonprofit Center for Responsible Lending.

E. Scott Reckard writes for the Los Angeles Times.

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