University of Texas Dallas professor of accounting and finance Umit Gurun recently asserted in a co-authored study that lenders misled consumers during the subprime mortgage crisis.
“Advertising Expensive Mortgages,” published online in the Journal of Finance, purports that a
substantial number of advertisements targeting U.S. borrowers specifically
minimized inevitable rate increases in their ad copy, choosing instead to
highlight low initial rates.
For example, a New York Post ad appearing in 2007 claimed
that a mortgage company specialized in a 1 percent loan or “lowest fixed rates
available” without indicating that those very loans carried an automatic reset
rate totaling much higher than made clear to the consumer.
In their research, Gurun and his team sorted advertising
into various types of “deceptive ads.” Their conclusion was that lenders relied
on this technique to draw customers who were unaware of planned increases after
a few years’ time. The researchers analyzed 40,000 ads and stated that few
clearly stated the long-term conditions.
“People cannot make these comparisons easily without all the
relevant information, so they are more likely to choose something that seems
like lower interest at the beginning, but overall it costs them more,” Gurun,
a financial product advertising specialist, said. “People need to better understand
financial products.”
Gurun and his colleagues expect the study’s results to help predict
housing price bubbles in the future.
“People should think about these issues on a regular basis and comparison-shop to see what the advantage would be to switch providers,” he said. “That kind of involvement in the market can save you a lot of money.”
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