I guess I should start out by stating that I do not find anything in this bit of junk mail to be the least confusing or misleading. Do you?
In case you can’t read it, it is a postcard from ING pitching their “ING DIRECT 5/1 Orange Mortgage.” It lays out what the loan would cost as compared to an average 30 year fixed. Although it does not use the term “adjustable rate mortgage” or “ARM” it gives the reader plenty of clues, including calling it a 5/1 and breaking out the numbers into two periods, with the interest rate for the second (Year 6-30) period labeled as “projected.”
Moreover, the text below the numbers, which is a lot clearer in real life than in this screen capture of a scan, reads, in part:
5/1 Orange Mortgage interest rate may increase after fixed rate period. Projected interest rate based on current index plus margin. The payment or rate is subject to adjustment in the 6th year.
I think they meant “and” rather than “or” in that last sentence, but this hits all the important highlights. The loan has a fixed rate for five years, then it may get more expensive. They may not call it an ARM, but they own up to the (fairly obvious) drawbacks of it. And these sentences are a significant portion of the total text on the card, which ends by encouraging the reader to “learn more” about the product by calling or visiting a website.
I guess I ought to disclose that I took out this particular mortgage from ING last March. Rates were higher then. (In fact, they have gone down further since this card was printed at the start of September.) So there wasn’t very much chance I would have been confused by the ad. But would anybody?
Ron Lieber at The New York Times thinks so. In his Your Money column this weekend, In Mortgage Ad, Two Wrongs Don’t Make a Right, he affects a tone of exasperated outrage.
One of the most important lessons of the mortgage collapse is that potential borrowers need clear explanations of exactly what kind of commitment they are making.
This ad, which he calls “very 2005” is a violation of that expensively learned lesson.
Lieber’s two wrongs refer to the fact that ING did not use the phrase “adjustable rate mortgage” and that it did use an unrealistically rosy projection of what the interest rate might be in years six through thirty.
With regard to the non-use of the term ARM, Lieber may have a point, albeit a legalistic and literal minded one. According to Lieber, since 2008 Fed regulations have required that advertisements for adjustable rate mortgages “must specifically describe that loan as an ‘ARM,’ an ‘adjustable-rate mortgage’ or a ‘variable-rate mortgage.’”
ING responded to this without admitting that they broke a Fed rule, but more or less promising to use the term ARM on future postcards. They also pointed out that although this card did not say “adjustable rate” it did say “rate is subject to adjustment.”
Am I to infer that if the card called the product the “ING DIRECT 5/1 Orange ARM” but skipped the bits about how the interest rate could go up, Lieber would be happier?
And as for the projected interest rate being too low, Lieber acknowledges that, wrong or not, ING deserves no blame for it. Fed regulations specify how those projections are to be made, leaving no leeway to the lender. Basically, the current rate is extrapolated out. If the adjustment formula is LIBOR plus 2.75%, and that would give you 3.375% today, then you must project 3.375% for year six and beyond.
Lieber calls this projection “utter nonsense” because it assumes that our current low rates will continue for decades. I agree that if I had to bet money on it I would say that rates will be higher in the future than they are now. But that is a judgment call and does not make the projection nonsense. Far from it. It is not immediately obvious what other way the projection could be made. And ING doesn’t say “interest rate may change after fixed rate period” it says “interest rate may increase after fixed rate period.”
Ultimately, critiquing the ad copy on a postcard is a bit silly. Lieber does not even claim to have been the least bit confused or misled by it himself. (Something that is not true of the author of this remarkably similar blog post from last February about a postcard from ING pitching a five year balloon mortgage.)
As I said, I refinanced with this ING product in the spring. It took months to arrange. I feel like I signed my name a hundred times at the closing and left with several pounds of paper, most of it disclosures of one kind or another. Mortgages are big complicated things.
Outrage that not enough of the details of the mortgage terms are disclosed in a piece of junk mail, or any advertisement is, well, utter nonsense. The card also neglected to mention that ING will escrow for property tax, insist that you have homeowner’s insurance, and may foreclose if you do not make the payments. Aren’t those things important too?
The postcard tells a consumer the single most important fact about the mortgage: the rate. The rest of the details are quite standard, assuming that you know what a “5/1” mortgage is. If you do not, you will find out all about it soon enough. That is why we have closings with all that paper and why the process is a lot more involved than buying something with a credit card. The idea that borrowers could be denied “clear explanations of exactly what kind of commitment they are making” is absurd.
I suppose a person could argue that advertising for mortgages, or any complex financial thing, should just be banned to prevent consumers from getting the false impression that they understand what is going on. In as much as that would decrease competition, that would not help much.
Or perhaps complicated things like ARMs should be abolished. I suspect that Lieber would be sympathetic to this idea. There are two problems with it. First, even a 30 year fixed is complex animal that needs a lot of explaining to the uninformed. And second, removing ARMs from the marketplace makes most borrowers worse off, since they must pay higher rates on fixed mortgages. As I have argued before, ARMs should almost certainly be more popular than they are.
Some bits of personal finance are complicated. That is an inevitable side-effect of living in a wealthy and advanced society. And it means that some important things cannot be fully described on the back of a postcard.