Money Obedience

Anybody who has any debt (including mortgage debt) would probably feel better about having less of it. My wife and I are no different. We, like so many others, have a home equity line of credit, and because we want to take care to lower our debt, we try to pay into it regularly. So, a few days ago I logged into my bank account to transfer some money from our checking account into our home equity line of credit. (Just so you know, we opened up this line of credit because it was free and because it allowed us to fund our work on vilkri.com a lot easier.) Alas, the transfer did not work!

I called the bank to figure out what happened. It turns out that our home equity line of credit was suspended a day earlier. The bank sent out a letter to inform us, but we had not yet received it. I was not that surprised. It was only last December, I think, that my bank had given me a silly line of credit. Here’s what happened: we had opened a relatively small line of credit, but then the bank decided to more than double our available credit, even though we had not borrowed a dime on the account, and the housing market was already declining. I signed up for the higher line of credit anyway having had not intention of ever incurring as much debt as the bank was willing to give me.

So why are they cutting us off now? Well, the bank’s letter basically states that the value of my home has dropped (where they get their original and new valuation numbers, I have no idea), and they say that my home value no longer supports the amount of my mortgage plus the home equity line of credit the bank decided to double only a year ago. Apparently, it no longer supports any line of additional credit, because they shut the whole line down! While I agree with the bank’s general assessment of the home value (and my wife adamantly does not), I have to say that their calculation of my housing debt does not make any sense to me. I used a small fraction of the home equity line of credit, but the letter calculates my credit risk as the whole amount of the open credit line. The truth is, though, that the equity in my house is substantial. (Let’s put it this way: if I made use of the entire home equity line, my equity would drop to about 20% of the current value of my house!)

My choices are that I make a case with the bank to reinstate at least part of my home equity line of credit, or just live with their decision. I’ll live with it because I’m pretty sure that I won’t need that line of credit anyway. Fact is, we’ve been paying it off over the last few months just by tightening our belts a little bit.

...so much for my personal situation. As for the bigger picture, now I see some of the reasons why our economy is in the mess it’s in. I am just as stunned as most people are by the current problems in our financial system. But this experience with my bank suggests to me that the banks in the US – and I suspect worldwide – seem to be run by people who are not the sharpest knives in the drawer. You see, until about two years ago any house, no matter its value, provided excellent credit. Mortgages were given above the then current value of the borrower’s house, crazy mortgages were structured, and few questions were asked about the creditor. We now know that this was just outright stupid. We knew it then, too, but “the music was playing” to paraphrase the now-deposed chairman of Citigroup, Chuck Prince; so people and bankers danced. Since then, my bank has made a complete turn-around, like so many others cutting off lending. As I said, 18 months ago, any house was good collateral. Now no house is good enough. Just as much as we knew that houses were not going to go up in price by 20% every year forever, we know now that house prices will not go down to zero. Bankers seem to behave as if that was going to happen.

Cutting back on credit becomes a self-fulfilling prophecy. Viable businesses that need funding to stay viable will encounter financial difficulties and may even go bankrupt without access to credit. And even households with conservative financial behaviors may find themselves in financial difficulties soon. I know that I am one of these households. (After all, we found out about this problem when we were trying to pay into our loan!) Let’s just hope that our economy snaps out of this downward spiral by becoming a little more sensible again, and let’s hope is happens soon!