July 20, 2008
By GRETCHEN MORGENSON
The collection agencies call at least 20 times a day. For a little quiet, Diane McLeod stashes her phone in the dishwasher.
But right up until she hit the wall financially, Ms. McLeod was a dream customer for lenders. She juggled not one but two mortgages, both with interest rates that rose over time, and a car loan and high-cost credit card debt. Separated and living with her 20-year-old son, she worked two jobs so she could afford her small, two-bedroom ranch house in suburban
Then last year, back-to-back medical emergencies helped push her over the edge. She could no longer afford either her home payments or her credit card bills. Then she lost her job. Now her home is in foreclosure and her credit profile in ruins.
Ms. McLeod, who is 47, readily admits her money problems are largely of her own making. But as surely as it takes two to tango, she had partners in her financial demise. In recent years, those partners, including the financial giants Citigroup, Capital One and GE Capital, were collecting interest payments totaling more than 40 percent of her pretax income and thousands more in fees.Years of spending more than they earn have left a record number of Americans like Ms. McLeod standing at the financial precipice. They have amassed a mountain of debt that grows ever bigger because of high interest rates and fees.While the circumstances surrounding these downfalls vary, one element is identical: the lucrative lending practices of
were in some of the wallets just amazed me.” Borrowing to ShopFor decades,
id. Although money was not discussed much around the dinner table, credit card debt was not a part of her parents’ financial plan, and sometimes personal purchases were put off. When Ms. McLeod married at 18, she and her husband carried no credit cards. She stayed at home after her son was born, but when she was 27 her husband died. She remarried a few years later and continued as a homemaker until her son turned 13. Between her husband’s job laying carpets and her own, money was not exactly tight. In the mid-’90s, Ms. McLeod got several credit cards. When the marriage began to founder, she said, she shopped to make herself feel better. Earning a livable wage at Verizon Yellow Pages, Ms. McLeod finally decided to leave her marriage and buy a home of her own in February 2003. The cost was $135,000, and her mortgage required no down payment because her credit history was good.“I was very proud of myself when I bought the house,” Ms. McLeod explained. “I thought I would live here till I died.” Adding to her burden, however, was about $25,000 in credit card debt she had brought from her marriage. Because her husband did not have a regular salary, all the cards were in her name.After she had been in the house for a year, a friend who was a mortgage broker suggested she consolidate her debts into a new home loan. The property had appreciated by about $30,000, and once again she put no money down for the loan. “It was amazing how easy it was,” she recalled. “But that’s a trap, and I didn’t know it then.”Naturally, the refinance had costs. There was an $8,000 penalty to pay off the previous mortgage early as well as roughly $1,500 in closing costs on the new loan.To cover these fees, Ms. McLeod dipped into her retirement account. Only later did she realize that she had to pay an early-withdrawal penalty of $3,000 to the Internal Revenue Service. Short on cash, she put it on a credit card.Soon she had racked up another $19,000 in credit card debt. But because her home had appreciated, she once again refinanced her mortgage. Although she was making $50,000 a year working two jobs, her income was not enough to support the new $165,000 loan. She asked her son to join her on the loan application; with his income, the numbers worked.“Boy, would I regret that,” she said. The decision would drive a wedge between mother and son and damage his credit profile as well.Almost immediately after she refinanced, in late 2005, the department store where she worked her second job, as a jewelry saleswoman at night and on weekends, cut back her hours. She quit altogether, and her son moved out of the house, where he had been helping with the rent, to live with a girlfriend. Ms. McLeod was on her own and paying $1,500 a month on her mortgage.Because the house had been recently appraised at $228,000, she said, she felt sure she could refinance again if she needed to pay off her credit card. “You felt like you had a way out,” she said.But as happens with many debt-laden Americans, an unexpected illness helped push Ms. McLeod over the edge. In January 2006, her doctor told her she needed a hysterectomy. She had health care coverage, but she could no longer work at a second job.She made matters worse during her recovery, while watching home shopping channels. “Eight weeks in bed by yourself is very dangerous when you have a TV and credit card,” Ms. McLeod said. “QVC was my friend.”Later that year, Ms. McLeod realized she was in trouble, squeezed by her mortgage and credit card payments, her $350 monthly car bill, rising energy prices and a stagnant salary. She started to sell knickknacks, handbags, clothing and other items on eBay to help cover her heating and food bills. She stopped paying her credit cards so that she could afford her mortgage.A year ago she was back in the hospital, this time with a burst appendix. Her condition worsened, and she lost the use of one kidney. She spent 19 days in the hospital and six weeks recuperating. Her prescription-drug costs added to her expenses, and by September she could no longer pay her mortgage.When her father died in early January, she was devastated. About a month later, on Feb. 14, Ms. McLeod was suspended and soon afterward fired from Verizon. Toting up her financial obligations, Ms. McLeod said she owed $237,000 on her home mortgage. Of that, sheriff’s costs are $4,350, and “other” fees related to the foreclosure come to $3,000. A house of similar size down the street from Ms. McLeod sold for $153,000 in January.Her credit card debt totals around $34,000, she said. Each month the late fees and over-limit penalties add to her debt. Ms. McLeod said she would probably file for bankruptcy.Patricia A. Hasson, president of the Credit Counseling Service of Delaware Valley, said Ms. McLeod would probably wind up having to repay 40 percent to 60 percent of her credit card debt. The owner of her mortgages could come after her for the difference between what she owes on her loan and what her house ultimately sells for. The first mortgage was sold to investors; Citigroup declined to say whether it held onto the second mortgage or sold it to investors.A sheriff’s auction of her home on June 12 received no bidders, Ms. McLeod said. The bank will soon evict her.“Oh, I definitely have regrets,” Ms. McLeod said. “I regret not dealing with my emotions instead of just shopping. And I regret involving my son in all this because that has affected him and his finances and his self-esteem.” Ms. McLeod says she hopes to be living in an apartment she can afford soon and to get back to paying her bills on time.She does not want another credit card, she said. But even though her credit profile is ruined, she still receives come-ons.Recently an envelope arrived offering a “pre-qualified” Salute Visa Gold card issued by Urban Bank Trust. “We think you deserve more credit!” it said in bold type.A spokeswoman at Urban Bank said the Salute Visa is part of a program “designed to provide access to credit for folks who would not otherwise qualify for credit.” The Salute Visa offered Ms. McLeod a $300 credit line. But a closer look at the fine print showed that $150 of that would go, as annual fees, to Urban Bank.