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."

Yet the industry's eagerness to issue mortgages -- and to boost card limits simultaneously -- created a "double financial bubble," says Robert Manning, author of Credit Card Nation: The Consequences of America's Addiction to Credit.

As home equity and card limits rose in unison, consumers overextended themselves. Banks encouraged consumers to take on "unrealistic levels of credit card debt," Manning says, and then to pay it off with home equity loans.

Kenna and Richard Baker of Des Moines say that as their home's value rose, they were barraged with offers for home equity loans and credit cards. They opened up new credit cards.

They also refinanced their mortgage twice and withdrew cash to pay off existing card bills and make home improvements.

But as the economy weakened and Richard's pay as a delivery driver fell, they used their cards again for necessities. "We had to pay the gas bill on cards one month or we'd get cut off," says Kenna Baker, 44.

Today, the Bakers owe $30,000 on credit cards and $105,000 on a home worth only $63,000. They blame themselves but also say lenders share responsibility for "making it so easy" to borrow.

Tripled limits

The seeds of the mortgage crisis -- and the emerging credit card crunch -- were planted as housing values began rising at an accelerated clip in 2001. Loose lending standards fueled demand for real estate, driving home prices sky high in many cities, says Paul Bishop, director of research for the National Association of Realtors.

Consumers tapped into a new wellspring of home equity to pay for home improvements, medical costs, even education. And they began using proceeds from lower-rate home loans to pay off higher-rate credit card balances.

As the shift to home equity loans gained traction, card debt slowed. Revolving debt, which had grown at a sizzling 12% annual rate in 2000, slowed to a meager 3% rate in 2005, near the peak of the boom.

Banks moved quickly to shore up their sagging card business. They blanketed consumers with a record 25.5 billion credit card offers from 2001 to 2005, partly to "compete with home equity loan (offers) in the mailbox," says Andrew Davidson, vice president at Synovate Mail Monitor, which tracks such data.

Banks also sent existing card holders approvals for huge step-ups in their spending ability. Banks know "you don't make money unless you get (consumers) to transact more, and one way to do that is to raise the credit card limits," says John Ulzheimer, who's worked as a manager at Equifax and Fair Isaac, creator of the FICO credit score.

Lewis-Parks, of Fort Lauderdale, says Chase and Bank of America raised her credit limits in 2006, shortly after she took out a larger mortgage on her home and extracted cash to pay off credit card bills and other debt. Banks, she argues, should first ask consumers if they want the additional credit before raising their credit limits.

Chase and Bank of America say they don't comment on individual situations, citing privacy concerns. Bank of America spokeswoman Betty Riess says that generally, "Customers like the fact that their credit line is increased" if the bank considers them a good customer. Chase spokeswoman Tanya Madison says the bank tries to "anticipate our customers' credit needs" by raising limits, but customers can always request less credit.

Pending legislation from Rep. Carolyn Maloney, D-N.Y., and Sen. Chris Dodd, D-Conn., seeks to give consumers more control over their credit limits. The bills would restrict banks' ability to approve charges beyond consumers' card limit and then assess a penalty. But they wouldn't require banks to ask consumers before raising their limits.

When banks extend more credit, younger consumers and the financially inexperienced are more likely to take on debt, a 2002 study by Amar Cheema, of Washington University in St. Louis, and Dilip Soman, of the University of Toronto, found.

Subprime borrowers, many of whom have little experience with credit, tend to use more of their available credit than others do. "Generally, these are consumers who have (greater) need for credit," says Myra Hart, a senior vice president at Equifax. ...

•	How rising home values, easy credit put your finances at risk USA Today, Wednesday, June 18, 2008 Byline: Kathy Chu and Byron Acohido, USA TODAY

	Story also ran in 2 others:  Gannett and Coshocton Tribune (OH)