US now a nation of half-home owners

Aug 16, 2008
US now a nation of half-home owners
Banks' ad blitz gave a positive spin to second mortgages, bringing
about current crisis

NEW YORK: Banks in the United States marketed them as easy 'home
equity loans', and Americans went for them in droves, resorting to
what was essentially a second mortgage.

The result? For the first time since World War II, Americans own less
than half their homes. In the 1980s, that figure was 70 per cent.

Citibank's home equity ads in the mid-1980s, for example, portrayed
housing as a revolving account similar to a credit card: 'Now, when
the value of your home goes up, you can take credit for it.'

In 1999, its 'Live Richly' slogan 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. Then, the loans became
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 US$1 trillion (S$1.4 trillion) from US$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 per cent to 50 per cent higher than returns on
consumer loans overall, 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 at 55 per cent above its average since the American
Bankers Association began tracking it around 1990; delinquencies on
home equity loans are 45 per cent higher. Hundreds of thousands are
delinquent, owing banks more than US$10 billion on these loans, often
on top of their first mortgages.

'Calling it a 'second mortgage', that's like hocking your house,'
said Mr Pei-yuan Chia, a former vice-chairman at Citi who oversaw the
bank's consumer business in the 1980s and 1990s. 'But call it 'equity
access', and it sounds more innocent.'

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

With such ads, banks encouraged home owners to keep borrowing. 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.

Today, the US has become a nation of half-home owners. Professor
Elizabeth Warren of Harvard Law School said financial companies used
advertising to foster the idea that it was good, even smart, to
borrow money.