The Two-Income Trap (38 page)

19
Calculation based on the following data: Five billion direct-mail card offers were sent out in 2001. “In Brief: 5 Billion Direct-Mail Card Offers Last Year,”
American Banker,
April 19, 2002, p. 10. In 2002, direct-mail card offers grew by 300 million mailings over 2001. “Foggy 2003,” in
Cardweb.com
,
January 3, 2003. Available at
http://www.cardweb.com/cardtrak/2003/january.html
[2/12/2003]. The average credit line per credit card was $7,160 in 1999; for the purposes of this calculation, we have assumed that this figure remained unchanged in 2002. Leslie Beyer, “The Outer Limits,”
Credit Card Management,
November 1999, p. 28. There are 105 million households in the United States. U.S. Bureau of the Census, 2000 Summary File, Table DP-1, Profile of General Demographic Characteristics, 2000.

20
Calculated from Thomas A. Durkin, “Credit Cards: Use and Consumer Attitudes, 1970-2000,”
Federal Reserve Bulletin
76 (September 2000): 623.

21
See Gillin, “Events Conspire Against Bankruptcy Reform.”

22
Todd Mason, “Jobless Relying on Credit Cards, Home Equity,”
Philadelphia Inquirer,
April 17, 2003; Manning,
Credit Card Nation,
pp. 4, 131.

23
Matt Olson, “Medical Debtors to the Poorhouse: Credit Card Companies Singing All the Way to the Bank,”
The Progressive
5, no. 7 (July 1, 2001): 30.

24
In 1997, 61 percent of homeowners who had taken a traditional home equity loan reported that they took the loan to repay other debts, compared with just 1 percent who took the loan to pay for a vacation. Among homeowners with a line of credit (a somewhat more affluent group than those with traditional home equity loans), 49 percent took a loan to repay debts, and 13 percent did so to take a vacation. Canner, Durkin, and Luckett, “Recent Developments in Home Equity Lending,” p. 248.

25
“Lobbyists Battle Over Bankruptcy Bill,” in
MSNBC.com
,
August 5, 2002. Available at
http://www.msnbc.com/news/790231.asp#BODY
[3/6/2003].

26
Among all homeowners in bankruptcy, 34 percent had either taken out a second or third mortgage or refinanced to obtain cash. Among homeowners with minor children, the figure is essentially the same, 32.4 percent.

27
Among families filing for bankruptcy, 49.7 percent reported credit card debts exceeding six months’ income. For this calculation, we excluded all families reporting no income, even though many of them were carrying large balances on their credit cards. As a result, we probably understate the magnitude of the problem facing these families.

28
“Credit card debt” or “trouble managing money” was listed by 55 percent of all the households filing for bankruptcy, but only 5.7 percent of all families, and only 3.7 percent of families with children, listed either of those reasons without also listing a job loss, a medical problem, or a family breakup as a reason for filing.

29
Judge Edith H. Jones and Todd J. Zywicki, “It’s Time for Means-Testing,”
Brigham Young University Law Review
(1999): 177-249.

30
In 1980, Congress passed the Depository Institutions and Monetary Control Act (DIDMCA), which phased out Regulation Q, thus allowing banks to pay higher interest to depositors. It also preempted state usury laws as they applied to deposityr institutions making loans secured by a first-lien home mortgage. After passage of the DIDMCA, the courts extended the usury law preemption to apply to non-purchase price first-lien home mortgages. Cathy Lesser Mansfield, “The Road to Subprime ‘HEL’ Was Paved with Good Congressional Intentions: Usuary Deregulation and the Subprime Home Equity Market,
South Carolina Law Review
51 (Spring 2000): 473, 492-495, and 511-521

31
Fannie Mae,
Becoming A Homeowner: How Much House Can You Afford?
In the “Homepath” section of
FannieMae.com
. Available at
http://www.fanniemae.com/homebuyers/findamortgage/becoming/started/houseafford.jhtml?p=Find+a+Mortgage&s=Becoming+a+Homeowner&t=Getting+Started&q=How+Much+House+Can+You+Afford?
[3/2/2003].

32
U.S. Bureau of the Census,
House-Poor/House-Rich
, Statistical Brief (August 1991).

33
Calculated from U.S. Bureau of the Census,
Annual Housing Survey for the United States and Regions: 1975, Part C, Financial Characteristics of the Housing Inventory,
Annual Survey (1977). Available at
http://www.census.gov/prod/www/abs/h150.html
[3/10/2003].
Table A.1
, Income of Families and Primary Individuals in Owner and Renter Occupied Housing Units, 1975. U.S. Bureau of the Census,
American Housing Survey for the United States: 2001,
Annual Survey (2001). Available at
http://www.census.gov/hhes/www/housing/ahs/ahs01/tab313/html
[3/4/2003]. Table 2-20, Income of Families and Primary Individuals by Selected Characteristics—Occupied Units. Note that because of the limitations of the standard survey reporting tables, for the 2001 survey we have defined middle class as earning between $20,000 and $100,000 a year. For the 1975 survey we have defined
middle class as earning between $7,000 and $35,000 a year, or $21,000 and $108,000 in inflation-adjusted dollars. “House poor” includes all families spending more than 35 percent of their income on housing, which was the highest level the government even bothered to report in the 1970s. The proportion of these middle-class homeowners spending more than 35 percent of their income increased from 2.8 percent in 1975 to 13.5 percent in 2001.

34
U.S. Bureau of the Census, Data User Services Division,
Statistical Abstract of the United States 1993,
113th ed.
The National Data Book,
compiled by Glenn W. King under the direction of Marie Argana (1993), p. 734, Table 1247, Recent Home Buyers—General Characteristics, 1976 to 1992.

35
Ruth Simon and Michelle Higgins, “Stretched Buyers Push Mortgage Levels to a New High,”
Wall Street Journal,
June 12, 2002.

36
Calculated from Yongheng Deng, John M. Quigley, Robert Van Order, “Mortgage Default and Low Downpayment Loans: The Costs of Public Subsidy,” National Bureau of Economic Research, Working Paper No. 5184 (July 1995), p. 12.

37
White House, Office of the Press Secretary, “President Hosts Conference on Minority Homeownership,” press release, October 15, 2002.

38
There are several companies affiliated under the “Citigroup” logo. For ease of identification throughout the chapter, we refer to all of these companies under this organization’s best-known moniker—Citibank. Likewise, we use “Chase” as the moniker for J.P. Morgan Chase & Co. For a list of the largest subprime lenders active in the United States, see U.S. Department of Housing and Urban Development (HUD),
HUD Subprime and Manufactured Home Lender List,
data set (2001). Available at
http://www.huduser.org/datasets/manu.html
[2/1/2003].

39
Lew Sichelman, “Community Group Claims CitiFinancial Still Predatory,”
Origination News,
January 2002 (reporting on new claims of CitiFinancial’s predatory practices after settlements with state and federal regulators).

40
Senate Banking, Housing, and Urban Affairs Committee, “Predatory Mortgage Lending,” statement made by Jeffrey Zeltzer on behalf of the National Home Equity Mortgage Association (NHEMA), 107th Cong., 1st sess., July 26, 2001. See also National Home Equity Mortgage Association, “Join NHEMA,” in
NHEMA.org
. Available at
http://www.nhema.org/Join/
[3/4/2003].

41
HUD,
Unequal Burden: Income and Racial Disparities in Subprime Lending in America
. Subprime Lending Report (April 2000). Available at
http://www.hudgov/library/bookshelf18/pressrel/subprime.html
[2/1/2003].

42
See Sichelman, “Community Group Claims CitiFinancial Still Predatory.”

43
HUD,
Unequal Burden.
To be sure, subprime lenders have focused more of their efforts among poorer homeowners; 26 percent of low-income homeowners end up with subprime refinancing, more than twice the rate of moderate-income families.

44
See, e.g., Howell E. Jackson and Jeremy Berry, “Kickback or Compensation: The Case of Yield Spread Premiums,” Working Paper, Harvard Law School (January 2002).

45
Dennis Hevesi, “A Wider Loan Pool Draws More Sharks,”
New York Times,
August 31, 2001.

46
The charges alleged that Citibank’s consumer finance unit employed deceptive practices to sell home loan insurance. To settle the case, Citibank agreed to pay $240 million, the largest settlement to date of a Federal Trade Commission consumer protection case. “Citigroup $240 Mln Lending Unit Settlement Approved,”
Bloomberg News,
November 15, 2002.

47
Paul Beckett, “Citigroup’s ‘Subprime’ Reforms Questioned,”
Wall Street Journal,
July 18, 2002.

48
For a thorough discussion of discrimination in mortgage lending, see Stephen Ross and John Yinger,
The Color of Credit: Mortgage Discrimination, Research Methodology, and Fair-Lending Enforcement
(Cambridge, MA: MIT Press, 2002).

49
Association of Community Organizations for Reform Now,
Separate and Unequal: Predatory Lending in America
(Washington, DC: ACORN, November 2002). Available at
http://www.acorn.org/acorn10/predatorylending/plreports/SU2002/index.php
[2/01/03]. See also Randall M. Scheessele, “1998 HMDA Highlights,” Working Paper HF-009, HUD, Office of Policy and Research (September 1999). Available at
http://www.huduser.org/publications/hsgfin/workpapr9.html
[2/18/2003].

50
HUD,
Unequal Burden.

51
Congress recently considered legislation specifically targeting “loan to own” practices as an amendment to the current Truth in Lending laws. See “Illinois Association of Mortgage Brokers Backs Important Consumer Protection Legislation,”
PR Newswire
, April 17, 2000; Consumer Mortgage Protection Act of 2000, 106th Cong., 2nd sess., H.R. 4213.

52
Margot Saunders, director of the National Consumer Law Center, explained in testimony before Congress: “Based on equity, a lender is in an advantageous situation: either the borrower pays the loan back with high interest or foreclosure on the home permits a recovery from the property directly. In fact, when foreclosure occurs and the borrower’s property is sold to the lender for less than fair market value (as it generally is), the lender can resell the property after foreclosure and realize the homeowner’s equity. These anticipated windfalls encourage some lenders to make loans designed to result in foreclosure.” National Consumer Law Center, “Testimony Regarding the Rewrite of Truth in Lending Act and Real Estate Settlement Procedures Act,” Before the Subcommitees on Housing and Community Opportunity and Financial Institutions and Consumer Credit, House Committee on Banking, Financial Institutions and Consumer Credit, U.S. House of Representatives, 105th Cong., 2nd sess., September 16, 1998.

53
Mortgage Bankers Association of America, Foreclosure at End of Quarter, U.S. (Unadjusted %), unpublished data, December 2002. By comparison, foreclosures grew from 0.15 percent of all mortgages in the first quarter of 1979 to 0.37 percent in the first quarter of 2002, an increase of nearly 150 percent. We note that the number of homes in foreclosure grew faster than the number of foreclosures started. Little has changed in the legal procedures of foreclosure, so the difference in the proportion of homes in foreclosure is primarily attributed to the fact that today, once foreclosure proceedings have been started, a home is more likely to proceed through the foreclosure process than it was a generation ago. This suggests that families today are less likely than families were twenty-five years ago to come up with the money to pay the mortgage company or to sell the house rather than lose it in foreclosure.

54
Mary Kane, “Creditors Happy to Lend to Bankrupt Consumers, New Credit Lines Are Often Higher,”
New Orleans Times-Picayune,
July 20, 1997.

55
In the past few years, business consulting firms have given lenders essentially the same advice. For example, in 1997 Fair, Isaac & Co. released a bankruptcy predictor program that it claimed could eliminate 54 percent of bankruptcy losses by screening potential nonpayers from the bottom 10 percent of credit card holders. Available at
www.fairisaac.com
. “Credit Cards: Fight for Bankruptcy Law Reform Masks Truth,”
American Banker
162 (September 8, 1997): 30.

56
A dozen years later, his view had clearly become part of the conventional wisdom among credit card insiders. Industry analysts routinely explain how hard it is “to differentiate between customers who are the most profitable from those most likely to file for bankruptcy. . . . These customers’ accounts often look exactly the same.” “Bankruptcy Losses on Cards,”
Nilson Report
779 (January 2003): 6.

57
David S. Evans and Richard L. Schmalensee,
The Economics of the Payment Card Industry
(Cambridge, MA: National Economic Research Associates, 1993). Banks are “fighting back” against borrowers who pay off their loans early by charging these customers more money. Teresa Dixon Murray, “Being Good Can Be Bad in Borrowing: Banks Hit Early Payers,”
Plain Dealer,
May 6, 2001. Beneficial National Bank of Delaware canceled the MasterCards of 12,000 customers who paid their bills in full; they are expected to cancel another 30,000 customers soon. Other lenders, such as NationsBank and GE Rewards MasterCard, have imposed fees or canceled cards for customers who pay their bills in full. Bruce Mohl, “The Careful Debtor Loses Credit at BJ’s,”
Boston Globe,
September 25, 1997. A Federal Judge recently struck down a California law that required card issuers to warn cardholders how long it would take for them to pay off their debt if they only made their minimum payments. “Federal Judge Strikes Down California Card Law,”
CardLine,
December 27, 2002.