• by Erik Sass  @eriksass1, September 12, 2007

As the sub-prime mortgage meltdown continues, the Federal Trade Commission on Tuesday warned over 200 companies that their advertising for mortgage products was "potentially deceptive." The main complaint: ads designed to give the impression that home loans are available at interest rates which, in fact, are unrealistically low. Publishers of media that carry these ads also got a warning that they "may violate federal law."

The FTC dragnet cited ads that appeared in magazines, newspapers, on the Internet, and in direct mail, including some Spanish-language ads. However, the FTC didn't publish a list of the companies it had warned.

Much of this advertising deals with sub-prime mortgages--high-interest loans made to individuals with poor credit. With a wave of foreclosures sweeping the country, the sub-prime lending debacle has shaken the economy. As the FTC warning indicates, mortgage advertising sometimes conceals the true cost of the loan. In an official statement Lydia Parnes, director of the FTC's Bureau of Consumer Protection, said: "Many mortgage advertisers are making potentially deceptive claims about incredibly low rates and payments, without telling consumers the whole story."

A recent article by Patricia A. McCoy in the Harvard Journal on Legislation, titled "Rethinking Disclosure in a World of Risk-Based Pricing," found that "numerous subprime ads are tantamount to affirmative misrepresentations." Specifically, McCoy said that many sub-prime lenders "entice customers with rosy prices that are not available to weaker borrowers, hike the price after customers pay a hefty application fee, then raise the price again at closing."

While some consumers are clearly getting fooled, most American adults are skeptical of mortgage advertising, according to an online survey of 2,383 adults by Harris Interactive, conducted May 8-14. The Harris study found that 66% of adults viewed mortgage advertising as "not credible," with an additional 22% finding it "not at all credible."

Attitudes toward home-mortgage products were linked to the type of product being advertised. Thus, traditional fixed-rate mortgages had the most positive reception, with 71% reporting a favorable attitude. This dropped to 52% for home-equity loans, 27% for no down-payment and 25% for "reverse" mortgages--the bogeyman of the sub-prime lending market. Older consumers were generally more knowledgeable about the variety of mortgage products than younger respondents.