Researchers analyze deceptive promotions for home loans

http://www.eurekalert.org/pub_releases/2016-07/uota-rad070716.php

Public Release: 7-Jul-2016
Researchers analyze deceptive promotions for home loans
University of Texas at Dallas

Lenders used misleading tactics in advertising home loans during the U.S. subprime mortgage crisis, according to a new study by a UT Dallas professor.

Dr. Umit G. Gurun, professor of accounting and finance in the Naveen Jindal School of Management, co-authored "Advertising Expensive Mortgages," recently published online in the Journal of Finance.

According to the study, borrowers spent on average $7,500 more on a $250,000 mortgage when taking an advertised "low-rate" mortgage, compared to an identical mortgage that was not advertised.

A significant number of these advertisements were misleading -- explicitly displaying initial low interest rates without mentioning higher reset rates. For example, a January 2007 ad in the New York Post touted a mortgage company that was "specializing in the 1 percent mortgage," and offered the "lowest fixed rates available." However, the ad failed to highlight that such loans had a reset rate, which is a much higher interest rate a borrower should pay after the reset date.

The researchers classify these types of advertising as "deceptive ads" and concluded the lenders used this method to attract customers who did not realize the rates would substantially increase after a few years. In an analysis of 40,000 advertisements, the researchers found only a handful of them clearly communicated the reset rate and 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 said.

In addition, the study determined that lenders used deceptive ads more in areas with higher rates of minority, less-educated and poor borrowers.

•••••