Citi gets religion

If you're late on your car payment or student loan payment or mortgage payment, your credit card company can jack up your interest rate, even if you've never been late with a credit card payment. It's a credit policy called "universal default."

Unfair? You bet. But since when do credit card companies factor fairness into their bottom lines?

Democratic control of both houses of Congress has made an impression on credit card companies. They're reluctant to do what's right, but they surely want to do what's smart. And it's smart not to rile Congress with outrageous credit policies.

Citigroup is eliminating universal default from all Citi-branded credit cards.

"Credit card issuers are announcing unilateral changes in their practices that have been criticized because they are now fearful that Congress will legislate in this area and they don't want that to happen," says Travis Plunkett, legislative director of the Consumer Federation of America.

Harvard prof Elizabeth Warren notes that Citigroup's alteration of its credit card policy comes a week after Sen. Chris Dodd held hearings on credit card practices.

"The Citigroup shift is an important reminder of the power of the Congressional hearing," Warren writes. "So long as the folks in charge of Congress didn't want to upset the credit card companies, the companies kept on adding new tricks and traps. But now direction has changed."

She's correct, and lenders aren't the only entities that are getting the message. In early January, the Senate held hearings on mortgage lending. This week, federal regulators suggested tighter guidelines for underwriting subprime mortgages. Coincidence? No. Word on the street in D.C. is that the feds fast-tracked these proposed guidelines in just a few weeks -- the weeks following the Senate hearings. The regulators now say that companies shouldn't lend money to people who will have a lot of trouble repaying the loans.

Blithe Manor

The New York Times profiles twentysomethings who fancy themselves real-estate moguls . Luciana Hyman is 24 and her husband, Daniel, is 27. They just bought a co-op in Manhattan for $875,000. Judging by the photo, it needs tens of thousands of dollars of fixing up.

As owners in a building with relatively lenient policies, like 10 percent down payments and flexible sublets, the Hymans talk about their apartment as a strategic investment that they someday plan to turn into cash.

"We're more comfortable with taking on debt and paying tomorrow," Mr. Hyman said. "If the cards topple, you can rent your place out and go somewhere cheaper."

Let's unpack this to demonstrate the unreality that the Hymans display, and the odd bias that the Times consistently shows -- an assumption that most twentysomethings (she's a schoolteacher and he's a securities trader) can afford homes that cost a million or more, give or take a hundred thousand.

I'll assume that they bought their share in the co-op building for $875,000 and put down 10 percent. That means they borrowed $787,500. Let's say that got an interest-only 5/1 ARM at 6.25 percent. The monthly payment for principal and interest is $4,102. That excludes co-op fees, taxes and insurance.

What happens if, in Daniel Hyman's words, the cards topple? Let's say that means there's a recession in which the value of the co-op falls by 20 percent and Daniel's income falls precipitously. At that point, their co-op is worth $700,000. If they have an interest-only loan and haven't aggressively been paying down principal, they owe $87,500 more than the place is worth. Meanwhile, their family income is down, so they decide to move out, find a renter, and rent an apartment.

If the co-op's value has dropped 20 percent, to $700,000, and if a lot of owners join the Hymans in putting their places on the rental market, the overall rental market is probably soft. What would be a fair market monthly rent in such an environment? $3,900, tops. Probably closer to $3,500.

Meanwhile, their monthly mortgage payment is $4,102, plus co-op fee, taxes and insurance. Unless they have $87,500 in cash, they can't refinance the loan. If they don't have $87,500 in cash, plus another $42,000 or so for the real-estate commission, they can't sell the co-op. On top of that, they're renting a place and commuting into the city.

It just doesn't work, and the reporter apparently didn't confront the Hymans for their blitheness.