Sunday, December 23, 2007

Unpaid Credit Cards Bedevil Americans

A kind reader (thanks!) pointed out this article to me.... part of the next flurry of shoes to fall by the cash strapped American consumer aka the world's consumer. I continue to believe the rising cost of living has been masked (for the homeowners) by their cash out financing in their homes aka ATM machine. Renters? I am trying to figure out how they have been surviving.... this is going to take a few quarters to play out (and the dollar amounts are not as huge as mortgages) and until the numbers start showing up in real data, the Goldilocks folks will tell you it's not a problem. Perhaps they are right. I am not in that camp though. Remember, the banks are siding with me, not Goldilocks TV commentators. They have been increasing their allowances for consumer defaults (this is getting lost in the focus on their massive writedowns). With that said, the 'forecasting' skills of banks should also be questioned by their last round of behavior... ;) But that is part of forecasting - if you simply rely on past information you have zero advantage over the 'crowd'.

Remember, across all income strata estimates are 70% live paycheck to paycheck. They don't have cushion for all forms of inflation now hitting them. The shell game has been home equity withdrawals... "now" they are going to credit cards.... when the credit card shell stops working I don't know. But just keep in mind, credit card debt has been packaged, securitized, and ship to your local hedge fund and (who knows?) local government municipality as well. Where this stuff is hiding is anyone's guess. This article taught me a new thing - 45% of credit card debt is now securitized. Wow. Also keep in mind, unlike mortgages (excluding the 2 year teaser type of longer dated ARMs) - credit card rates can change at a moment's notice. So your 11% rate can suddenly jump to 29% if you are late... on that card or really on any card in your portfolio. So unlike mortgages where you have some visibility (think hurricane), credit card rates can change at a moment's notice (think tornado). And that only makes the debt even harder to service... plus late fees.

Let's just cross our fingers and hope (aside from all those layoffs you will see in January in the financial world, once the executives get their huge year end bonuses), that most people do continue being employed ... or it can get far worse, far quicker than currently imagined.
  • Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come.
  • An Associated Press analysis of financial data from the country's largest card issuers also found that the greatest rise was among accounts more than 90 days in arrears. Experts say these signs of the deterioration of finances of many households are partly a byproduct of the subprime mortgage crisis and could spell more trouble ahead for an already sputtering economy.
  • "Debt eventually leaks into other areas, whether it starts with the mortgage and goes to the credit card or vice versa," said Cliff Tan, a visiting scholar at Stanford University and an expert on credit risk. "We're starting to see leaks now."
  • The value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October from a year earlier at 17 large credit card trusts examined by the AP. At the same time, defaults -- when lenders essentially give up hope of ever being repaid and write off the debt -- rose 18 percent to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission. [again the raw totals are relatively small, but the percent increase is the focus here... this is still in an economy with historical low unemployment AND roaring GDP growth - if you believe the government numbers. Not hard to imagine a much darker figure if either of these pillars starts falling, but this will be a very lagging indicator. Americans are very good at playing the shell game... until they run out of shells]
  • Serious delinquencies also are up sharply: Some of the nation's biggest lenders -- including Advanta, GE Money Bank and HSBC -- reported increases of 50 percent or more in the value of accounts that were at least 90 days delinquent when compared with the same period a year ago.
  • The AP analyzed data representing about 325 million individual accounts held in trusts that were created by credit card issuers in order to sell the debt to investors -- similar to how many banks packaged and sold subprime mortgage loans. Together, they represent about 45 percent of the $920 billion the Federal Reserve counts as credit card debt owed by Americans.
  • Even after the recent spike in bad loans, the credit card business is still quite lucrative, thanks to interest rates that can run as high as 36 percent, plus late fees and other penalties.
  • The trend carried into November. As of Friday, all of the trusts that filed reports for the month show increases in both delinquencies and defaults over November 2006, and many show sequential increases from October.
  • Discover accounts 30 days or more delinquent jumped 25,716 from November 2006 and had increased 6,000 between October and November this year.
  • Economists also cite America's long-standing attitude that debt -- even high-interest credit card debt -- is not a big deal. "The desires of consumers to want, want, want, spend, spend, spend -- it's the fabric of our nation," said Howard Dvorkin, founder of Consolidated Credit Counseling Services in Fort Lauderdale, Fla., which has advised more than 5 million people in debt. "But you always have to pay the piper, and that can be a very painful process."
  • Filing for bankruptcy is no longer a solution for many Americans because of a 2005 change to federal law that made it harder to walk away from debt. Those with above-average incomes are barred from declaring Chapter 7 -- where debts can be wiped out entirely -- except under special circumstances and must instead file a repayment plan under the more restrictive Chapter 13.
  • In the wake of the jump in defaults on subprime mortgage loans made to borrowers with poor credit histories, banks have been less willing to allow consumers to consolidate credit card debt into home equity loans or refinanced mortgages. That is leaving some with no option but to miss payments, economists said.
  • Investors also are backing away from buying securitized credit-card debt, said Moshe Orenbuch, managing director at Credit Suisse. But that probably has more to do with concerns about the overall health of the U.S. economy, he said. "It's been getting tougher to finance any kind of structured finance -- mortgages, automobile loans, credit cards, student loans," said Orenbuch, who specializes in the credit industry.
  • "You're looking at more and more distress -- consumers desperately trying to preserve their credit lines, but there's nowhere else to go," said Robert Manning, director of the Center for Consumer Financial Services at Rochester Institute of Technology. "It's like a game of dominoes."
Dominoes.... shells.... you get the picture. We are a subprime nation. Wages pressured by a flattening global labor force... inflation rearing it's head... consumerism an "American right" (spend spend spend). I think the master plan by our central bank(s) is to try to force mortgage rates to 5.5% or lower (they can't directly affect the long term rate, but are working feverishly through various means to push in that direction) so people can try the refinance game yet again. Those with equity left in their house that is. Like a drug addict I think it becomes less effective each time we 'shoot up'. Should be interesting....

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