Bolt from the Blue

Megabank Lowers Hammer

on Value of Local Home

                                                  By Mike Kirby

             The letter from the Bank of America freezing their line of credit came as a nasty surprise for the Plaza family in Shutesbury.  Their personal banker at the Bank of America office in Amherst had very little information on what was going on.  The decision had been made elsewhere, and the letter had been sent from their consumer loan center in Richmond, VA.

            Jim Plaza is a career audio-visual technician at the University of Massachusetts and has been there for almost 25 years.   His wife also works at the University. They pay all their bills on time, and have a credit rating in the high 700s (the national average is 675).

            Freezing their line of credit meant they couldn’t make any more purchases on it,  or use it for collateral,  or borrow against it.  Their plans to hire an excavation firm to do work to dry out their wet basement went out the window.  And their net worth had been cut in half.      

           The unsigned letter dated  March 18 was from a John Thompson,  vice president  of the bank. Property values in their area had dropped, the letter stated.  When Plaza called the Charlotte, N.C, call center, he found that his house, once valued at $228,000, was now valued at $107,000.  This was a dramatic fall, and much less than the $180,000 valuation of the house by the town for property taxes purposes.

               The house is a nice-looking, small older Cape on about 13.5 acres.  Plaza’s father built it in 1944; it has three bedrooms, two bathrooms, and hardwood floors. The house is situated on a paved road.  Equivalent homes in Shutesbury are selling for around $250,000.

                 Property values are holding their own in this area, but the real estate  bubbles busting in California, Nevada and Florida seem to be weighing heavily on the view of the big guys. Thousands, maybe millions, of letters must be going out. The chill deepens.

                 Plaza and I went over the letter together and the bad news seemed to have originated at a Bank of America office in Rancho Cordova, CA.  I can visualize a huge computer out there evaluating real estate all over America.   Three years ago the computer was wearing rose-colored glasses, and everything was possible.  Eager for business, the bank offered Plaza and his wife an attractive low rate that convinced them to get their line of credit from the big-time bank instead of a Greenfield bank, which has their first mortgage.   Now the rose-colored glasses are in the wastebasket, and the computer was looking at worst-case scenarios..

                 I never knew that lines of credit carry these poison pills, but my banking officer at Florence Savings Bank told me that the fine print enabling cancellation or modification in case of a value drop is almost universal among banks. Panic seems to be spreading through the banking world and today’s casualties are not high rollers. They are average working people.

                 Plaza told me he thinks their action was triggered when he put $20,000 on the credit line to buy a new car.  His stepson was a student at Greenfield Community College and had a part time job and his car, a 1997 Nissan, failed inspection and his whole exhaust system had to be replaced.  His wife gave the student her 2004 Saturn, but now dad and mom needed a reliable car.  They bought a new Nissan, and put it on the letter of credit, and  then almost immediately, Plaza cashed in a retirement account to cut his loan balance.  So, as of a couple weeks ago the balance on the letter of credit was about $35,000.

                 But on March 3 someone from California conducted  a credit check on Plaza, and then the Bank of America in Richmond launched its heat-seeking missile.   The other day Plaza and wife decided that it was a message from the fates that they shouldn’t take on any more debt.  They were now poor, or something close to it.

                  I talked with a guy at Bank of America in California who was authorized to speak to the press, and he talked to me in such a rapid-fire, well-practiced manner that I had to holler to him to stop so my note taking could catch up.

                  Spokesman Terry Francisco told me that yes, because of the declining home values and the deterioration of the market, in February they “started a program to reach out” to existing customers with  lines of credit; people whose property was impacted by “significant declines in value and decreasing levels of activity.”

                   The bank needed to “adjust their access to credit.”   He also said that there was an appeal process and people affected who feel there is a problem should contact “the team.”  No, the bank did not want to provide me with the number the people needed to call, so I am going to give Jim Plaza  Francisco’s number, and let him  try to get in touch with the appeal team.  I sensed that the bank might be open to compromise.

                     I downloaded the Bank of America’s annual report and read an apologetic letter from President Kenneth Lewis.  He feels badly that the bank is having a bad year and disappointing its stockholders. This trouble today, of course, might be fallout from his eyes-wide open dive into peril in his 2007 acquisition of the  Countrywide Mortgage Co., one of the major players responsible for the sub-prime mortgage catastrophe. Now the mainstream customer is paying for other people’s mistakes and criminality. 

                     I talked to a leading real estate broker and he gave me his take on the situation.  The big national banks when they assess their exposure look at regional statistics, So, Shutesbury to them is in the Springfield metropolitan area.  In Springfield itself, a great tide of foreclosures makes the whole area look bad.  Your area is not stable, says the big  guys.

                     Another factor in all this may be the newly emerging impact of gas prices.  In the 1970s and 80s millions of people bought in the Hilltowns and other outlying communities because land and buildings were relatively affordable. Nowadays places like Cummington and Shutesbury look very expensive if you figure in commuting costs.  If or when the market does soften in this area, and prices drop, it will probably start in those somewhat remote communities.