Surely the American consumer will bail us out...right?
I THINK NOT!!!!<g>
interactive.wsj.com
September 28, 2000
Debt Woes Loom for Americans
Who Enjoyed the Credit Boom
By BERNARD WYSOCKI JR.
Staff Reporter of THE WALL STREET JOURNAL
VERNON HILLS, Ill. -- For years, James Blaha's answer to unmanageable debt was simple: add more debt.
In 1994, he and his then-wife bought a $130,000 house in a Chicago suburb with a $7,000 down payment of mostly borrowed money. When they had trouble making the $1,300 mortgage payments, they sometimes funded them with their credit cards.
"We had to have the nice house, the nice furniture," recalls Mr. Blaha, contrasting his own modest Chicago background with his aspirations. Life got more expensive when their baby daughter was born. Total credit-card debt ultimately hit $17,000. Then Mr. Blaha borrowed an additional $22,000, his maximum, against his retirement savings at work.
Today, Mr. Blaha's credit lines are all tapped out. It's payback time, and it hurts. At age 42, he still works as a copywriter for a hotel-supply company, making about $40,000 annually. He moonlights 18 hours a week as a United Parcel Service Inc. package checker. Divorced, he has child-support payments. He rents an apartment and is behind on his $750 rent. One bill he can't let slide: Every month, he pays hundreds of dollars to various creditors to work down his $35,000 mountain of debt.
Anxiety Attacks
"I've talked with a lawyer about bankruptcy, and I won't do it," he says. "But I get anxiety attacks over this."
It's more than just an isolated case of mishandled finance; Mr. Blaha's predicament is common. Bingeing on a seemingly endless stream of easy credit, America's middle class is spending more and saving less than ever before. And yet in many cases, the inevitable hangover takes years to develop, precisely, say some in the credit industry, because it's so easy these days to postpone the reckoning simply by borrowing more.
"We see this phantom," says Catherine Williams, president of Consumer Credit Counseling Service of Greater Chicago, a nonprofit outfit funded by creditors. Unlike strapped consumers of the mid-1990s, she says, "they have great credit reports. No collection activity. No 'past due' notices. But they have chosen to refinance as a last resort, and their debts are mounting. Then, they skip just one house payment, figuring, 'If I get that overtime, I'll be fine and catch up again.' "
On a national level, the Federal Reserve and others have warned that the biggest expansion in consumer debt has taken place among households with income below $50,000. In that bracket, 20% had debt-to-income burdens of 40% or more in 1998, well up from 1995 levels of 15% of such households. Only 5% of higher-income American households carried burdens this high.
But a clearer picture emerges only up close, in places like the modest, leafy neighborhoods of Chicago and its suburbs. It's true that in the 1990s, credit expanded everywhere in America, even in the poorest inner-city neighborhoods. But the democratization of credit has flowered fully out in the suburbs, and this is where living on the edge has become something of a modern-day race with the bill collectors.
The "payday loan" storefront is becoming a fixture in strip malls of Chicago suburbs, offering cash in advance of the next paycheck.
"People have a short-term liquidity squeeze," says Terrence Donati, president of Sonoma Financial Corp., which made 82,000 payday loans last year in 30 Chicago-area offices, all outside the inner city.
Business is booming: Mr. Donati says his loan volume is growing at about 20% a month. He adds that when Sonoma began operating in 1997, there were three such outlets in all of Illinois. Today, there are more than 500, including Sonoma's competitors.
The rates are $20 per $100 borrowed, which comes to 521% when annualized. Far from being the indigent, Sonoma's clients are typically earning $25,000 to $45,000 a year. Prominent among the customers are teachers, policemen and health-care workers.
To borrow against next week's paycheck is a barometer of just how close to the edge they are running these days. And it raises the question of whether some kind of moderate-income reckoning is at hand, bringing much more hardship on a macroeconomic scale: foreclosure, bankruptcy and tarnished credit.
Evidence to date is mixed. Overall, in greater Chicago, a typical U.S. metropolitan area in terms of borrowing trends, consumer-debt delinquency rates are moderate and barely budging. And for some consumers, refinancing works out fine. For instance, by rolling credit-card balances into a mortgage, borrowers often can lower their interest rates and even gain tax deductions on interest paid.
Ending with a Loud Bang?
On the other hand, the ability to take on more debt may be masking a problem. Stuart Feldstein, president of SMR Research, a Hackettstown, N.J., consumer-debt research firm, sees an ominous increase in "high-leverage lending," where the ratio of the loan to people's underlying income is large. He warns that refinancing booms "tend to end with a loud bang."
Already, foreclosures begun in greater Chicago doubled to 17,813 in 1999 from 8,555 in 1993, according to Foreclosure Report of Chicago, a Barrington, Ill., reporting service. More than half last year took place in the suburbs.
So-called subprime lenders account for a significant portion of the foreclosure increase. Targeting customers with tarnished credit records, such firms charge higher interest rates and sometimes tack on large fees. In the far-western suburb of Hanover Park, to cite a typical example, subprime lenders began 26 foreclosure proceedings in 1999, according to court records, compared with one such case in 1993.
Middle-age, middle-class Marilyn Scott is the living embodiment of what can go wrong, as she fights to stave off foreclosure and keep her home.
Upstairs in her detached Hanover Park home, Ms. Scott runs a beauty salon, where she chats amiably with customers as she cuts and styles hair. Down in the kitchen, 55-year-old Ms. Scott faces a stack of bills she simply can't pay.
For 30 years, since a 1970 divorce, Ms. Scott has supported herself as a hairdresser. Then, in 1997, she survived cancer and chemotherapy, but it drained her energy and savings. Her income fell to $1,500 a month. She couldn't obtain disability payments, but the bills still mounted. Her monthly medical insurance tripled to more than $900, for example. Meantime, the $800 monthly mortgage, the utility bills, the car-loan bills and other expenses kept rolling in. Her dexterity impaired, she found buttoning her clothes very difficult and used charge cards to buy clothing with zippers.
Then she found what she thought was the magic bullet to eliminate her mounting debt: Ms. Scott refinanced her house, paying off her car loan and rolling thousands of dollars in debt into a big, new $122,000 mortgage, at an annual rate of 9.5%. But it's a financial albatross. The payments on the new mortgage soared to $1,289 a month from $800 on her old, smaller mortgage. With her savings drying up, Ms. Scott feels helpless. In August, she borrowed the mortgage payment from her nephew.
Financial Triage
"This isn't the violin you're hearing," says Ms. Scott, refusing to think of her predicament as a sob story. "But it doesn't look very good."
She has to perform financial triage. The top-priority bill is the mortgage, which is serviced by Delta Funding Corp. of Woodbury, N.Y. Then comes her health insurance, which has luckily fallen back to $300 monthly. Ms. Scott still enjoys some of the small luxuries of middle-class life. She has a mobile phone, which she wants in case of emergency, but that cost her $67 last month. She still has cable television, at $34 a month. At the same time, she has to forgo dental work.
Several months ago, her pastor at Trinity Lutheran church suggested that Ms. Scott get counseling. These days, Nisha Koita of Metropolitan Family Services in nearby Wheaton is trying to help her rebuild her business, and to refinance her loan on less-onerous terms.
If the stresses on consumers are beginning to show in these prosperous times, with the U.S. unemployment rate at 4.1%, it's possible to foresee much bigger problems if the U.S. economy turns sour.
Real-estate specialists in foreclosure already have targeted Chicago's suburbs. One of the most prominent is Carole O'Neill. Last year, this specialty vaulted her into the No. 3 top-producing spot among Coldwell Banker brokers in greater Chicago.
$1,000 for a House Key
"I actually do the evictions," says Ms. O'Neill, who represents lenders who have foreclosed on homes. One of her standard practices is to offer "cash for keys," whereby she may entice people with $1,000 after a foreclosure judgment to vacate the premises. "Otherwise I go out there with the sheriff," she says, noting that on a recent Saturday, an evicted homeowner out in affluent St. Charles refused to budge.
Also springing up in Chicago, as elsewhere, are buyers who specialize in foreclosed properties, often tidying them up and reselling them, or even leasing them back to the evicted owners.
Statistically, foreclosure is still a rarity in the suburbs -- only a tiny fraction of 1% of all households lose their homes. With house values up in most of Chicago, homeowners tend to fight to hold this asset for the equity built up. Far more common are consumers caught in a lesser liquidity squeeze, often after they run their credit card balances to their maximum, either to afford the finer things they never had, or to recreate the affluence of their youth.
"I grew up in a more affluent home, but I chose to lead a different life," says Liz Ellis, an actress turned massage therapist. In the 1990s, she met and married her husband James, a slim man with a goatee, a clown performer at Renaissance festivals. And as time wore on, they fell deeper into debt.
In 1998, they found a quaint bungalow on a tree-lined street in northwest Chicago for rent at $1,200 a month. With their total yearly income fluctuating around $30,000 or so, it seemed a stretch. But they rented the house anyway, saved for a nice television, and ran their credit cards and other debts to more than $20,000.
"Ask me how Liz is when we have money problems," says Mr. Ellis.
"I'm horrid," volunteers Ms. Ellis.
They began setting priorities on bills. At the top was the rent. For Mr. Ellis, the bottom priority was tax payments to the Internal Revenue Service. To his wife, the lowest priority consisted of paying down credit-card debt. As it turned out, both fell into arrears.
Early this year, though, a debtor's fantasy came true for the Ellises, both in their late 30s. Ms. Ellis landed a spot on the NBC game show "Twenty-One" and won $160,000.
They bought the house they were renting, with 20% down. They wiped out all their debts, more than $20,000. They put aside $15,000 for their 20-month-old daughter's college tuition. They replaced their garage at a cost of $9,700, allowing Mr. Ellis to build festival floats there. They haven't yet paid Uncle Sam the $60,000 they owe from the game-show windfall, though the state of California collected 7%, or $12,000, right off the top.
The Ellises say that the credit-card solicitations never stopped completely during their tight times. Today, they are bombarded with offers. Mr. Ellis is adamantly against taking even one credit card. Even with their recent winnings, they don't feel financially secure.
From Mr. Blaha's desperate point of view, however, even a $35,000 windfall would put him on an even keel financially. In his case, the income is there. Mr. Blaha has been steadily employed at the same company since 1988. It's just that his debts and obligations eat up all his funds.
Making matters worse, his driver's license was recently suspended after multiple traffic violations. This means he commutes between his jobs by van and suburban railroad. Even this inconvenience pales next to the constant anxiety of living with a checking account that constantly hovers just above zero.
One recent afternoon, Mr. Blaha had a $300 check to deposit, against which he had to withdraw $216, almost draining his funds. Then he needed to turn the cash into a $216 money order, made out to a credit-counseling agency that in turn forwards the money to his creditors. The agency doesn't accept checks.
It's a measure of Mr. Blaha's financial situation that he didn't spend the $3 to send the money order from his bank. Instead, he traveled a quarter-mile to a storefront finance office, which only charged him 65 cents to send the money order.
"In my circumstances," says Mr. Blaha, "every dollar counts."
Got PVN shorts? (Disclosure: I sure as hell do!!!) |
