For Mortgage Industry, a Time of Desperation

During the height of the housing market bubble, a mortgage company was often shameless in how it pursued new business. Whether it was jacking up its hidden closing costs to make loans appear cheaper than they were or using teaser rates, lenders made owning a home seem easy.

Too easy.

Fast forward a couple of years, and home mortgage defaults are soaring to new heights. Foreclosures were up 90 percent in May alone. And lenders are finally realizing that allowing, even coaxing consumers to borrow a lot more than they can afford is, as business strategies go, just dumb.

What’s a mortgage marketing maven to do?

Well, bereft of their teaser rates, the marketing whizzes at least one major lender apparently decided that scare tactics are the way to go.

Just consider the direct-mail solicitation a CNN Money writer recently got from GMAC. The letter was addressed to a loyal “Washington Mutual Customer” - the person has a 30-year, fixed-rate mortgage with WaMu - and began ominously:

“You’ve probably read about it in the newspaper or seen it on the nightly news. Many mortgage lenders all across the country are heading for financial trouble because they have made too many questionable home loans. Some lenders may even go out of business. And what will become of the people who trusted those lenders if that happens?”

Then came the kicker: “Allow us to help you with mortgage refinancing at the rate and term that best suits your needs.”

GMAC’s pitch is absurd on many levels.

The letter implies if you have a conforming mortgage, that you could somehow lose your mortgage should your lender go bankrupt. That’s simply untrue.

Even more troubling was the impression GMAC gave of the mortgage lender its letter appeared to be targeting, Washington Mutual.

WaMu calls the mailing “false and misleading,” and she’s absolutely right.

GMAC Mortgage - now majority-owned by private equity firm Cerberus Capital, with General Motors retaining a minority stake - touts itself as “a stable and established lender” in its mailing, but its below-investment-grade credit rating is actually several notches below that of WaMu.

To be sure, WaMu’s home loan business is struggling - bad credit mortgage related losses contributed to a 20 percent decline in bank profit during the last quarter.

However, WaMu’s overall exposure to the subprime market pales in comparison to GMAC’s own. At the end of last year, subprime comprised 10 percent of WaMu’s mortgage portfolio - about $20 billion total.

GMAC mortgage, meanwhile, reported $48 billion in bad credit mortgage loans, 76 percent of its total home loan portfolio.

GMAC spokesman Stephen Dupont sounded genuinely apologetic. The letter was part of “test mailing,” Dupont said. “It’s not something that we’re going to be repeating.”

SOURCE: CNN Money / Fortune