Mortgages and Credit Cards

[kent nickell]

This problem has several ramifications. Credit card defaults tend to rise along with rises in unemployment. Also many people who were getting into financial difficulty were using these cards for home mortgage payments and other living expenses. Thus this continues the ongoing necessary process of deleveraging but will put further strains on essential services which are already being overextended leading to tent cities, increased food lines etc.... (Also of course this will severely constrain consumer spending (a major portion of the US economy) as a path out of our current problems)

http://www.reuters.com/article/hotStocksNews/idUSTRE52F75620090316

U.S. credit card defaults rise to 20 year-high

Mon Mar 16, 2009 - excerpt

NEW YORK (Reuters) - "U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express Co and Citigroup amid a deepening recession. Credit card lenders are trying to protect themselves by tightening credit limits, rising standards, and closing accounts. They have also been slashing rewards, raising interest rates and increasing fees to cushion further losses.

Meredith Whitney, one of Wall Street's best known and most bearish bank analysts, estimates that Americans' credit card lines will be cut by $2.7 trillion, or 50 percent, by the end of 2010 -- and fewer Americans will be offered new cards."



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There is an excellent short video at this link.. The credit card bubble is next but there is still a strong 12-18 months to go with the mortgage meltown according to FICO president...

http://www.calculatedriskblog.com/2009/03/fico-president-worst-to-come-for.html

Friday, March 13, 2009

FICO President: 'Worst to come' for Mortgage Crisis
by CalculatedRisk on 3/13/2009

"Before we do the credit cards, we are actually not done with the mortgage [crisis] - the worst of that is yet to come in fact. The thing about mortgages is you can predict when they are going to reset and you can sort of see what is coming. We easily have another 12 to 18 months of pretty ugly times in terms of mortgage resetting. ... Credit cards are next."

FICO (formerly Fair Isaac) CEO and Michael Porter,

Porter also defends FICO scores as useful (no surprise), and I think he is mostly correct. Unfortunately during the housing bubble, many lenders used creditworthiness (and FICO scores) as the only measure to allow a loan. Historically lenders used the "Three C's": creditworthiness, capacity, and collateral.

On capacity, during the bubble, lenders qualified borrowers at teaser rates - or the Neg Am rate for Option ARMs. They didn't consider if the borrower could meet the fully amortized rate. On collateral, lenders just assumed housing prices would increase and 100%+ LTV loans were common. All three C's still matter.

 

[kent nickell]

Re: Mortgages and Credit Cards

Another good interview with Meredith Whitney by Steve Forbes. She sees home prices falling another 30% which seems very reasonable. This will severely worsen the banks toxic assets. The 2 main factors affecting the value of toxic assets are home prices and unemployment and bad unemployment levels are expected to last until at least the end of the year with rates up to 10-11%. This will put more pressure on banks for fundamental restructuring. She sees the endgame as the 5 largest banks eventually one way or another as disaggregating and selling off their component parts to smaller regional banks that are closer to the mortgage borrowers.

Two-thirds of mortgages are held by the top 5 banks which are in very bad shape. Another 50-100 banks are in bad shape but this still leaves 8000 fairly healthy banks to eventually pick up the slack. The shadow banking system of investors buying mortgage backed securities to fund borrowing won't return in at least the next several years and then will likely be less in the shadows...

She also sees in the near future banks severely cutting back on credit card limits to the tune of an overall 50% reduction. Many people use credit cards especially now as a way of getting by so this effectively works as another pay cut...

She hopes for a U shaped recovery rather than an L shaped slog but bases this on a fundamental restructuring of the economy with the development of new innovative growth industries....

http://www.forbes.com/2009/04/03/meredith-whitney-credit-intelligent-investing-video.html