Credit Card Defaults move to Forefront of Deflation Debate

A wave of defaults and foreclosures hit residential real estate. That was followed by a significant weakening in commercial real estate, and now Unpaid Credit Cards Bedevil Americans.

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. That represented more than 4 percent of the total outstanding principal balances owed to the trusts on credit cards that were issued by banks such as Bank of America and Capital One and for retailers like Home Depot and Wal-Mart.

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.

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.

Until recently, credit card default rates had been running close to record lows, providing one of the few profit growth areas for the nation's banks, which continue to flood Americans' mailboxes with billions of letters monthly offering easy sign-ups for new plastic.

But what is coming into sharper focus from the detailed monthly SEC filings from the trusts is a snapshot of the worrisome state of Americans' ability to juggle growing and expensive credit card debt.

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.

Capital One Financial Corp. reported that delinquencies and defaults are highest in regions where troubled mortgages are concentrated, including California and Florida.

Among the trusts examined, Bank of America Corp. had the highest delinquency volume, with overdue accounts valued at $5 billion. Bank of America defaults in October were almost 200 percent higher than in October 2006.

A spokesman for Charlotte, N.C.-based Bank of America declined to comment.

Other trusts - including those linked to Capital One, American Express Co., Discover Financial Services Co. and those containing "branded" cards from Wal-Mart Stores Inc., Home Depot Inc., Lowe's Companies Inc., Target Corp. and Circuit City Stores Inc. - also reported striking increases in year-over-year delinquency and default rates for October. Most banks and other financial institutions holding credit card debt on their own books also reported double-digit increases in delinquencies.

"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."

Here is the key sentence in the above article: "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.

The attitude towards risk is changing. It started with rising lending standards on home loans but has now spread into autos, credit card, and student loans. Decreasing willingness of lenders to lend and consumers and businesses to borrow is part of the psychology of deflation.

In response to Insurance from MBIA and Ambac Worthless someone asked me if municipal bonds would be the domino to trigger a massive chain reaction. My response was: "I doubt a re-rating of municipal bonds by itself would do it unless it triggered a cascade of defaults." Having said that, more dominoes keep falling and one of them is eventually going to matter.

The Current Picture

• Residential foreclosures are enormous
• Commercial real estate is heading south
• Credit card delinquencies are rising sharply
• REOs will dramatically increase once the wave of Alt-A and pay option ARMs hits
• Ambac and/or MBIA are in serious trouble with funding
• Ambac and MBIA put municipal bond ratings in jeopardy

The current picture is not pretty nor is there anything remotely inflationary with it. It took a while, but now credit cards can be added to the growing list of problems. Rather than a single domino triggering a collapse, perhaps there is simply a sudden out of the blue implosion caused by too much debt with no possible way to service it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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