Moody's: Credit Card Chargeoffs Rising Rapidly

We've long warned about the credit card situation, and how it would be seen as a significant danger once we get through the discovery that more than subprime loans are the issue. Back at blog inception we mentioned the whole daisy chain would go - it was not a "subprime issue" as the pundits and authorities insisted - subprime was simply a symptom of the disease, not the disease. We said specific to mortgages the damage would feed the food chain from subprime, to Alt A, to prime. Home equity lines would get hit. Auto loans would get hit. Student loans would get hit. And while those were getting hit people would be funneling debt onto credit cards. See, the house ATM was the base of the pyramid over the past 10 years - without the base, everything else crumbles for those who spend above their means. (or have no choice for the lower tranches of the economic scale)

So the credit card issue would be a lagged effect - but once that game ends and there is no place left to put the debt, the personal bankruptcies would ensue in a large wave - we said this would be a 2009 scenario and I'm sticking with that timeline. Now the irony is credit card companies/financial companies in 2005 lobbied hard to get bankruptcy laws much more stringent so normal Americans are going to suffer a lot longer than under the old rules - but we know who sets the rules in Washington... not the peons.

A handful of stories on this issue....

1. [Sep 15 '07: Consumer Spending Continues, Where is the Money Coming From? Credit Cards]
2. [Dec 10, 07 - Consumers Increasingly Turning to Credit Cards]
3. [Dec 23, 07 - Unpaid Credit Cards Bedevil Americans]
4. [Jan 10: Credit Card Warnings Here, Credit Card Warnings There]
5. [Apr 4: Late Payments on Consumer Loans at 16 Year Highs]
6. [Jun 3: Credit Card Usage is Surging, Risking Another Debt Crisis]
7. [Jun 22: Americans Running Out of Places to Hide Debt - Now Credit Cards Go]
   
8. [Sep 23: Loan Delinquencies Continue their Path Upward]

The data is finally starting to hit in a meaningful way; per Moody's bank's charge offs are beginning to fly upward. For those who have not been following along - guess what investment banks did with all this credit card debt - you guessed it, spliced it/diced it/packaged it and sold it to investors worldwide as a low risk way to make some dough. No different than mortgages.

• Moody's Investors Service said credit card charge-offs rose 48 percent in August, according to the ratings agency's latest data on $435 billion in credit card loans backing securities Moody's rates. Moody's said Thursday it expects charge-offs -- loans written off as not being repaid -- to continue to rise into and throughout 2009, eventually surpassing peak rates seen during past recessions.
• Friedman, Billings, Ramsey & Co. analyst Scott Valentin said in an interview Friday that he expects charge-offs to increase right through 2009, and estimates charge-offs at Capital One Corp. will jump 25 percent by the end of 2009 and 30 percent at American Express Co. during that time.
• The August charge-off rate -- which measures the amount of balances written off as uncollectable as an annualized percentage of total loans outstanding -- surged 48 percent to 6.82 percent, compared with 4.61 percent during the same month a year ago, Moody's said in a report. It was the 20th consecutive year-over-year increase in the charge-off rate. The charge-off rate was 6.36 percent in July.
• Capital One (COF) said Thursday its charge-off rate in its U.S. card division jumped to 6.13 percent during the quarter ended Sept. 30. It was just 3.85 percent during the year-ago quarter. Capital One said it expects its charge-offs in its U.S. card division to increase to the mid-seven percent range by the first quarter of 2009. Charge-offs grew 53 percent to $1.58 billion during the quarter, from $1.03 billion during the third quarter last year at Capital One.
• Trust data from American Express (AXP) showed default rates of 6.14 percent in September at the card lender, the highest rate since November 2005 when bankruptcy laws changed, Valentin said. "American Express is showing the most rapid deterioration in the group," Valentin said.
• Moody's said the charge-off rate could rise to 8.5 percent by the end of 2009, above a post-recessionary peak of 7.1 percent in May 2003.

So aside from chargeoffs - the people who ARE paying, are paying less. But remember folks, the bulls of summer 2008 would have us believe that as gasoline prices fell 50 cents, Americans would flood back into malls (and I assume pay off their cards) since that extra $15 a week would make all our problems go away. Or so they drove up the stocks on that thesis.

• While more balances were written off, customers making payments also paid less of their balances. Moody's said cardholders paid back, on average, 17.4 percent of their outstanding credit card debt in August. In August 2007, customers repaid 20.07 percent of their outstanding balance. It was the 13th consecutive year-over-year decrease.

Financial media is catching on, but mainstream media seems mostly out of the loop - a report from CNBC last week.

• Credit-card delinquencies are likely to become the next flashpoint in the credit crisis, though the impact on the overall economy won't be as severe as the housing slump, analysts believe. As the economy worsens and unemployment rises, more Americans are having trouble paying off their credit card balances. That has pushed up losses for credit card issuers, forcing them to tighten standards, which puts a further squeeze on cash-strapped consumers.
• “After mortgages and home equity, credit cards are the next in line to feel the crunch,” says Marc DeCastro, an industry analyst with Financial Insights.
• And because consumers no longer have the equity in the house to fall back on, they're relying even more on credit cards to pay for living expenses. “Now with their home equities getting shut off, people are going to start augmenting their income with their credit cards," DeCastro says. "They are going hit their limits and once they hit their limits, then they are probably going to walk away from their credit cards.” (works for homes where you put nothing down - why not credit cards?)
• Credit card debt, while still large, is much smaller than the amount tied up in mortgages. (yes I assume the average Joe does not have $150-$350K on credit cards)
• There is roughly $1 trillion of outstanding credit card debt—compared to $14 trillion worth of outstanding mortgages. (oh, 1 trillion? that's NOTHING! Easy in this economy to print that out and bail it all out)
  
• In the second quarter of 2008, $385 billion of this had been bundled into asset-based ecurities, according to the Securities Industry and Financial Markets Association (oh goody, can't wait to see what countries or states or local municipalities were sold this pile of junk as a "nearly risk free way to make more than money market rates")
• Most models (of losses) do not sufficiently account for the freezing of the transfer market, in which borrowers could rollover debt into new cards with a low (or zero) introductory annual percentage rate (APR), says the investment research firm. That option is quickly disappearing, leaving a growing raft of people with more debt than they can repay and no place to turn. (and so will the personal bankruptcy wave of 2009 and 2010 emerge) That essentially was the situation that burst the subprime mortgage bubble, when people could no longer just roll over into a new subprime or sell their house. (same people living over their heads without thinking of the future - just a different vehicle)
• Retailers are probably the most vulnerable, mainly because they are usually the last to get paid by strapped consumers. Since these cards can only be used in the stores issuing them, they are typically the last to get repaid, raising the chances of charge-offs, especially as the economy weakens. (another potential negative for retailers)
  
• Another problem for the industry is its exposure to borrowers with less-than-stellar credit, also known as sub-prime. That’s believed to be about 20 percent industry-wide
• Even if consumer spending retains its holiday sparkle, the real test for the credit card industry, he says, will come in early summer, when families’ ability to stay current on bills rolled over from the holiday binge, and when delinquencies typically pick up.
• "People are basically spending far more than they earn and that is just going to have to change, especially if banks are not willing to indulge that kind of behavior any more, that’s going to have big repercussions in the economy,” says Gregory Larkin, a senior Innovest analyst. (bingo)

And that leads us to [Sep 20: US News & World Report - The End of the Shopaholic Nation?] [Oct 12: The New Age of Frugality] and [Sep 7: Newsweek - Get Ready for the Pain of Paying]

Well at least until the banks recover and like a drug dealer returning to old haunts revisits their old habits, and forgetting recent lessons that will be long forgotten by 2013 or so. But until then the consumer nation is going to go through a jarring adjustment and with 70% of GDP in America attributed to "consuming" we're in for a long period of subpar growth.