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TESS VIGELAND:We’ve heard from lots of you about how banks are cutting your credit lines. Everything from credit cards to home equity loans. And it’s happening at every income level, even to sterling bank customers.
Stacey Vanek Smith has the story of one couple who got caught in their bank’s catch-all credit net.
Stacy Vanek Smith: It’s a perfect evening in the Southern California beach town of Encinitas. Surfers bob in the waves, pelicans fly in formation, couples gather on a high bluff to watch the sunset. Avis Durgan and Jeff Stevenson come here every night.
Avis Durgan: Oh, the sunset’s going to be early tonight, because there’s a marine layer.
Jeff Stevenson: Oh we’ll see. One of the things we’ve learned living here is that you can’t predict the sunset the way you sort of think you can.
And these days, the same goes for your financial future. Avis and Jeff had a healthy savings, a fat portfolio, a strong 401k and they sold their house at the top of the market. That put them so far ahead that in 2007 Jeff quit his job at Microsoft, and the couple traveled for a year. Then the market collapsed.
Avis: You know, you’ve been saving for 15 years and it’s gone? How could we have imagined that we would have lost half our money in six months?
Almost immediately, though, Jeff — who’s in his late 50s — got a good job near Encinitas. And with some scaling back, he and Avis — she’s in her early 50s — were able to buy a house. To help smooth the transition, Jeff and Avis tapped about $20,000 from a $100,000 credit line they had with Wells Fargo. They’d had the line for 10 years and rarely used it. Then the letter came.
Avis: So this is the letter that we got from Wells Fargo. And it says they’re discontinuing the line of credit and that starting in November we have to pay it back at 2 percent of the outstanding balance for 50 months, plus interest.
Translation: Wells Fargo cancelled Jeff and Avis’ credit line and required them to pay back the $20,000 within four years. That means Avis and Jeff will see their monthly payments jump from less than $50 to several hundred, plus interest and fees. And here’s the really weird part. Just four days before they got that letter, Wells Fargo had given Avis and Jeff a big mortgage loan. A loan they could no longer afford.
JEFF: Doing something like this just, boy.
AVIS: To say “We’re going to give you a mortgage and then in five months we’re going to make it impossible for you to pay that mortgage” is beyond belief. I mean, what kind of a business model is that?
The business model of a panicked industry, says Robert Manning, founder of the Responsible Debt Relief program. He says almost a trillion dollars in credit will disappear over the next year and a half, as banks shut down unsecured lines of credit and credit cards. And Manning says, high earners are getting hit, too.
Robert Manning: Today, everybody’s at risk of losing their jobs. Higher income households owe more money and now the banks are concerned a high-income household’s account, they would lose two, three, four times as much as a middle-income account.
Banks are trying to cut credit and shed risk so fast that one part of the bank — like the mortgage part — doesn’t always know what another part of the bank is doing, says NYU economist Lawrence White.
Lawrence White: Banks are rediscovering that it’s a risky world. I’m sure there’s been some over-reaction. It’s hard to not have an over-reaction after what we’ve gone through.
Wells Fargo told Marketplace it didn’t single out Avis and Jeff; it discontinued their type of credit line entirely. Wells Fargo also said only a small percentage of its clients were affected. But Avis says the bank’s actions have put her and her husband in financial distress. And now their lives will have to change, if they want to keep their house.
Avis: How is it going to change?
Jeff: We’re still trying to figure that one out, actually, yeah.
Avis: This is such a shock. We felt that we’d already made the changes. Let’s see: how often to we eat out? Once every couple of months? Jeff takes his lunch to work every single day. We don’t have a fancy car, anything like that.
Avis says now she needs to get a job, if she can find one. And she and Jeff will have to drain their savings, or what’s left of it, to pay off their mortgage and credit-line loans.
In Encinitas, Calif., I’m Stacy Vanek Smith for Marketplace Money.
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