Desperate measures for the mortgage business

A recent mailing from GMAC shows how low at least one lender will go to drum up new mortgage business, says Fortune's Jon Birger

By Jon Birger, Fortune senior writer

NEW YORK (Fortune) -- During the height of the real estate bubble, mortgage lenders were often shameless in how they pursued new business. Whether it was jacking up hidden closing costs to make loans appear cheaper than they were or using absurdly-low teaser rates on option- or interest-only ARMs to get customers in the door, lenders made owning a home seem easy.

Too easy. Fast forward a couple years, and mortgage defaults are skyrocketing. Foreclosures were up 90 percent in May alone, according to RealtyTrac. And lenders are finally realizing that coaxing consumers to borrow more than they can really afford is, as business strategies go, just plain dumb.

You'd think that the prospect of flooded coasts would mean that beachfront real estate prices would be sinking. But you'd be wrong. Fortune's Jon Birger dives into the topic. (Read the column.)

What's a mortgage marketing maven to do? Well, bereft of their teaser rates, the marketing whizzes of at least one major lender apparently decided that scare tactics are the way to go.

Just consider the direct-mail solicitation I recently received from GMAC Mortgage. The letter was addressed to me as a "Washington Mutual Customer"- I have a 30-year, fixed-rate mortgage with WaMu - and it began ominously: "You've probably read about it in the newspaper or seen it on the nightly television news. Many mortgage lenders all across the country are heading for financial trouble because they have made too many questionable 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 refinance your mortgage with the rate and term that best suits your needs."

GMAC's pitch is absurd on so many levels I barely know where to begin. First off, the letter implies if you have a conforming mortgage, as I do, that you could somehow lose your mortgage should your lender go bankrupt. That's simply untrue. Sure, there could be some servicing glitches should your loan be acquired by another bank, but that's more an annoyance than a genuine financial safety issue.

Even more troubling was the impression GMAC gave of the lender its letter appeared to be targeting, Washington Mutual (Charts, Fortune 500). WaMu spokeswoman Libby Hutchinson calls the mailing "false and misleading," and she's absolutely right. GMAC - now majority-owned by private equity firm Cerberus Capital, with General Motors (Charts, Fortune 500) 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 - subprime-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, meanwhile, reported $48 billion in subprime loans, 76 percent of its total home-loan portfolio.

So what does GMAC have to say for itself? I called the company to ask about the letter, and 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." Top of page