How rising home values, easy credit put your finances at risk
— -- At the peak of the housing boom, April Lewis-Parks' three-bedroom house in Fort Lauderdale doubled in value. To her surprise, her credit card limits soared even more.
One card issuer more than tripled her spending limit, to $17,000. Another increased her limit 60%, to $16,500. Lewis-Parks' income hadn't risen. Nor had her credit score changed much. "The only thing that went up," she says, "was the equity in the house."
That pop in her credit card buying power was no accident.
During the housing boom, from mid-2001 to early 2006, banks raised card limits at a blistering pace across the nation, in part because of a surge in home equity, much of it now vanished. As home prices ballooned, banks also plied customers with a record number of offers to open new card accounts. Then they guided card borrowers to pay off card balances with artificially inflated home equity, putting their homes at risk.
Today, the mix of high-rate debt and meager home equity has squeezed consumers — and threatens to prolong the economic slowdown. Those are the findings of a USA TODAY investigation, based on analyses of credit card data from Equifax credit bureau, Moody's Economy.com, Synovate Mail Monitor and Mintel Comperemedia.
The consequences are visible. Foreclosures are at record levels. And credit card delinquencies are nearing a six-year high as millions of borrowers struggle to keep up with a record load of revolving debt, mostly on credit cards.
Card issuers extended too much credit, too quickly because of the "phantom equity" in people's homes, says William McCracken, CEO of Synergistics, a financial-services research firm.
In turn, this "reckless extension of credit is contributing to the financial vulnerability that many families are facing," says Travis Plunkett of the Consumer Federation of America.
USA TODAY's analysis of credit card data found that during the housing boom:
• The average credit card spending limit rose a cumulative 17%, to $8,158, after adjusting for inflation, as median pay was declining and living costs were rising. Cardholders have an average of five cards.
• Banks doubled the amount of new credit cards issued to "subprime" customers — those with tarnished credit. This group could least afford to sink deeper into debt yet were most likely to tap additional credit.
• Banks encouraged customers to use their inflated home equity to pay off mounting card balances. In doing so, borrowers converted unsecured revolving loans into debt secured by their homes, which they now stand to lose if they can't pay their bills. Many financially squeezed borrowers ran up more card debt.
Now, even with the economy ailing, banks have continued to expand credit limits. They're also raising more borrowers' interest rates to as high as 30% — at a time the Fed is cutting rates — and collecting a record amount of penalty fees.
Banks are "hoping that in an atmosphere of tight credit, these people will have nowhere to go and be forced to pay high interest on their card balances," says Elizabeth Warren, a Harvard law professor. "It's a straightforward profit calculation."
Willingness to lend
Banking officials dispute any notion that they exploited swelling home values to expand credit limits. They contend that higher card limits between 2001 and 2006 simply made good business sense.
James Chessen, chief economist for the American Bankers Association, says rising home values and a booming stock market made banks willing to lend. "There was rising equity in houses, growing wealth, and the economy was growing quickly," he says.
Joe Belew, president of the Consumer Bankers Association, argues that home value was just one factor — and not the most important one — banks used in deciding how much to expand consumer credit. In raising card limits, Belew says, banks look first to a borrower's ability to repay a loan.
It's "perfectly reasonable" for lenders to look at home equity to decide how much credit to extend, says Mark Zandi, chief economist at Moody's Economy.com, because "The home is the most important asset many households have."
