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Rising Defaults on Credit Card Bills

Wednesday, August 29, 2007 | 07:43 AM

in Consumer Spending | Credit | Economy | Psychology/Sentiment

This can't be good:

"US consumers are defaulting on credit card payments at a significantly higher rate than last year, raising the prospect of problems in the stricken US subprime mortgage market spreading to other types of consumer debt.

Credit card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate - a measure of cardholders' willingness and ability to repay their debt - fell for the first time in more than four years."

I suspect that there is a big swath of folks who can no longer refi their homes . . . So after their rates reset 300 bips or so, they take cash advances to pay the mortgage -- then default on the Credit card debt, rather than the mortgage.

However, as FT notes:

"But it is not clear that the borrowers defaulting on their credit cards are the same people defaulting on their subprime mortgages, it added. This is in part because underwriting standards in the credit card sector have been more robust than in the mortgage industry.Also, many highly leveraged subprime borrowers, with little or no equity in their homes, may choose to default on a mortgage before losing their credit cards."

(I have been meaning to get to this issue for some time. Let me see if I can dig up a chart on this to put it into some perspective . . .)

One other thing:

"Recent increases in credit card losses can in part be ascribed to a steady rise in personal bankruptcy filings since 2005. According to the Administrative Office of the US Courts, quarterly non-business bankruptcy filings have been rising since the first quarter of 2006.

Scott Hoyt, economist at Moody's Economy.com said: "Consumer credit quality will continue to deteriorate as debt burdens and financial obligations rise, house prices continue to fall, credit standards are tightened, labour markets loosen modestly and gasoline and other energy prices remain high."

The Chicago Tribune adds:

"Now that the easy money in home mortgages is all but over, consumers may soon be caught in a financial squeeze with their credit cards.

That's the worry among some economists and credit counselors as home lending has shifted abruptly into low gear this summer. That leaves homeowners owing big sums to Visa or MasterCard without an important escape hatch -- the ability to pay down the plastic by dashing off a check from their home equity line of credit or rolling the debt into a new, bigger mortgage.

"You're not going to be able to get that mortgage loan. You'll be stuck with the higher interest credit card debt," warns Carl Steidtmann, chief economist with Deloitte Research. "We will have to live within our means. I know it's a troubling phenomenon. But we're not going to be able to spend at levels well above our income levels."

This is worth watching, as it can reveals the degree of actual financial stress the consumer is under . . .

Source:
Defaults on credit card bills in US rising
Saskia Scholtes
FT, August 28 2007 03:00
http://www.ft.com/cms/s/0/f37a80c6-54fe-11dc-890c-0000779fd2ac.html

The next credit crunch?
As home loan market tightens, mounting credit card debt could spur new crisis
Susan Chandler
Chicago Tribune, August 26, 2007
http://www.chicagotribune.com/business/chi-sun_crunch0826aug26,0,4784210.story

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Meanwhile, the filthy rich beg for a handout. It's all about the little guy right?

The Punch Bowl Caucus

The motley collection of gazillionaires, conservatives, and industrialists begging the Fed to cut interest rates.
By Daniel Gross
Posted Monday, Aug. 27, 2007, at 6:07 PM ET

Federal Reserve Board Chairman Ben Bernanke
In the past week, a strange group has been pleading for the Federal Reserve to return the punch bowl to the toga party—to slash interest rates to restart the Wall Street party. The Punch Bowl Caucus, whose members hail from all over and hold different ideological views, share a common belief: that the Federal Reserve, by reducing either or both of the interest rates it controls, can turn the clock back to the halcyon days of 2005 and 2006, when home values moved in only one direction, when defaults were nonexistent, and when credit to homebuyers, consumers, and, above all, to hedge fund operators, ran downhill like a mighty stream.

CNBC commentator James Cramer founded the caucus with his now-famous capitalist manifesto on Aug. 3. (He serves as honorary chairman of the Wall Street chapter.) Cramer urged the Fed to act on behalf of the greatest among us—"My people [that is, hedge fund operators, private equiteers, and assorted tycoons] have been in this game for 25 years. And they are losing their jobs and these firms are going to go out of business"—as well as the least among us. "Fourteen million people took a mortgage in the last three years. Seven million of them took teaser rates or took piggyback rates. They will lose their homes."

While Cramer's tirade was lighting up YouTube, desperate manufacturers banded together to form a Midwestern chapter. Ford CEO Alan Mulally and Chrysler CEO Robert Nardelli may be new to Detroit, but they've quickly adopted the local custom of looking to Washington when sales begin to slump. A week after signing on to Chrysler, Nardelli, the former CEO of Home Depot, realized he had jumped from one position where he got nailed by the declining housing market to another where he's likely to get nailed by the declining housing market. (Falling housing prices and less-forgiving credit markets are making more Americans think twice about tapping home equity to finance $30,000 car purchases.) So on Aug. 16, Nardelli suggested it would be a good idea if the Fed were to cut rates. The following week, Ford CEO Mulally obliquely echoed (subscription required) Nardelli's call.

Posted by: SPECTRE of Deflation | Aug 29, 2007 8:07:29 AM

Credit card debt rising faster than personal income is a tell tale sign of a desperate consumer who's just trying to stay above water. FUGLY!

Posted by: SPECTRE of Deflation | Aug 29, 2007 8:10:07 AM

Readers may be interested in the book, "Maxed Out: Hard Times, Easy Credit, and the Era of Predatory Lenders" by James D. Scurlock. He describes borrowers "surfing their debt" - switching credit card debt to mortgage refi's with teaser rates. And now the tide has come in.

Posted by: Deborah | Aug 29, 2007 8:21:52 AM

Credit card debt rising faster than personal income seems the major reason the personal savings rate went negative.
I'd say this whole economy is quite a bubble taking in its last little puff of air.

Posted by: New Yorker | Aug 29, 2007 8:53:34 AM

Words to live by. In fact you can't spend even slightly more than your income.

Posted by: Old Ari | Aug 29, 2007 9:03:05 AM

From Torgersons Blog, related to the IRS income report last week;

(quote)

What the Times did not report is that the average income for those earning less than $100,000 in 2005 was $31,849, $2,914 lower than the $34,763 earned in 2000....So basically, the "bottom" 90% of us (those earning less than $100,000)are living on wages that are 8% below what they were in 2000, much worse than the 0.9% (overall) reduction the Times reported. This doesn't mean that everyone experiences this income drop in exactly this way. What it does mean is the IRS data conclusively proves that the old adage of "the rich get richer and the poor get poorer" is quite literally true in the Bush era. The White House response to the growing imbalance of wealth and income? It "is not a very interesting story."

(end quote)

The proof is coming home that the economic growth of the last few years was due to real estate inflation.

The credit card debt will be the next collapse, except it won't take as long as foreclosure.

Posted by: Neal | Aug 29, 2007 9:04:51 AM

Mr. SPECTRE, you make good points. I can only add to what you have said by revealing what seems to me to be 'the strange bedfellow effect' by including politicians to the punch bowl effort. CF article on Bloomies this A.M. by Jonathon Weil. Even Al Gore has recognized the contagion of subprime toxic slime and is asking central bankers worldwide to stop global swarming!!

Posted by: Ross | Aug 29, 2007 9:15:43 AM

"...warns Carl Steidtmann, chief economist with Deloitte Research. 'We will have to live within our means. I know it's a troubling phenomenon. But we're not going to be able to spend at levels well above our income levels.'"

An incredible statement that shows how deeply inside the opium den we have been living - when "living within our means" and not spending "at levels well above our inceome" is a "toubling phenomenon".

Did they seriously think this insanity could last indefinately?

Posted by: Winston Munn | Aug 29, 2007 9:16:39 AM

Even though credit card defaults are up 30% this year, they are below where they were in 2004.

http://www.bankstocks.com/images/070828ccdqs.jpg

Interested to see your take on this, Barry.

Posted by: Brian | Aug 29, 2007 9:28:39 AM

Is it possible that the low interest rate environment has actually improved the financial positions of the prudent-minded consumers and investors that could potentially offset the reckless behavior of the sub-prime crowd? The current "mortgage meltdown" and "credit contagion" is certainly a crisis to some degree but, considering the enormous attention the crisis is receiving, could it be that the masses are being distracted and, as a result, overlooking current opportunities or, possibly, other existing threats?

It seems that market participants are paying undivided attention to a matter that deserves perhaps half, but not all, of our energy.

Are there other issues that can be discussed? TBP and its participating commenters nailed the mortgage and credit problems several months ago... Distraction is dangerous to the prudent investor...

Posted by: The Financial Philosopher | Aug 29, 2007 9:50:21 AM

Even though credit card defaults are up 30% this year, they are below where they were in 2004.

http://www.bankstocks.com/images/070828ccdqs.jpg

Interested to see your take on this, Barry.

Posted by: Brian | Aug 29, 2007 9:28:39 AM

Your retort reminds me of those that were downplaying subprime when this first got rolling. It won't happen in a single day. The market will decide on timing, and God help you if you are wrong sided on this bet.

The headlines this morning make it plain that we are at the abyss. First it was subprime, then Alt-A, then Jumbo and now prime. ABCP is now involved, and we all know that ABX is toast. There will be no winner or loser in derivatives because both counterparties have this crap marked to Goldilocks. Let me also add that student loans have now become involved. FUGLY!

Credit problems are spilling over into the student loan sector (CNBC)
Last night DealBreaker editor John Carney explained to the On the Money audience how the credit crunch may combine with action on Capitol Hill to make student loans an expensive cocktail for college students. Of course, loose credit for college has probably made education an over-valued asset anyway. Introducing some rationality into this market may not be such a bad thing.

Posted by: SPECTRE of Deflation | Aug 29, 2007 9:51:00 AM

Will any of this actually hurt Apple? Where can it go?

Posted by: col18 | Aug 29, 2007 10:08:23 AM

Well one can easily understand all those grads tripled up in $3000 month 1 beds here in Fun City might be a bit stretched when they lose their jobs or can't find one and mom and dad stop paying the rent.

Posted by: New Yorker | Aug 29, 2007 10:11:14 AM

This from Argus research. Contrary opinion.

If there’s a recession brewing, someone apparently forgot to tell the business
sector. In a period when more and more economists are forecasting doom and
gloom, one of the more telling indicators of future economic activity — new
orders for durable goods — rocketed by a dazzling 5.9% in July. Orders
excluding the volatile transportation component climbed 3.7%, the largest
monthly increase in almost two years. Meanwhile, the critical level of nondefense
capital goods excluding aircraft (NDCGXA) shipments surged an
impressive 3.8% in July, setting the stage for solid business investment for the
third quarter. Furthermore, the level of new orders for NDCGXA inched up
0.5% in July, a positive sign for future business investment spending. If
businesses truly expect the consumer to roll over and the economy to teeter
on the edge, then they wouldn’t be ordering manufactures at such an
accelerated pace.

Posted by: JohnnyB | Aug 29, 2007 10:15:57 AM

This from Argus research. Contrary opinion.

Posted by: JohnnyB | Aug 29, 2007 10:15:57 AM

Tit for tat from Herb Greenberg yesterday:

Hussman: Why Stocks are Overpriced

Stocks are cheap based on forward earnings? Uh, uh, here's what the always astute John Hussman, of Hussman Funds, explains why in his weekly commentary that is worth the price of admission. A snippet:

It's particularly interesting that the forward operating earnings crowd has advanced the notion that stocks are as cheap as they were in 1990. Aside from the problems with forward operating earnings that I've previously detailed, this particular argument rests on overlooking the state of profit margins, which were quite depressed in 1990 and are at record highs currently. Think about that for a moment and you'll see what's going on. A forward P/E multiple on depressed profit margin assumptions provides at least some margin for error. The same forward P/E based on assumptions of the highest profit margins in history contains no such margin.

Seen from another perspective, the price/peak earnings multiple was just 11 in 1990, with a long-term return projection for the S&P 500 of about 14%. Currently, the multiple is at 17.4, with a long-term total return projection of about 5%. Factoring in profit margins, the situation is worse. In any event, it's enough to study the charts at the beginning of this market comment to get a good feel for the relative validity of these alternative approaches.

Anyone? Anyone? I rest my case.

Posted by: SPECTRE of Deflation | Aug 29, 2007 10:26:24 AM

This seems like a no brainer to me.
The root cause of the housing credit woes is that risk was grossly underpriced. Why would it be only that one segment of one market that would be subject to this mania. I can't imagine that there is a category of debt that has not been underpriced.

Certainly there is a lot of anecdotal evidence that there are problems. The balance transfer offers from credit cards. The convenant lite loans used by private equity etc.

Posted by: Ralph | Aug 29, 2007 10:28:33 AM

I'm kind of a car guy. I tend to notice automobile related everything. About 4-5 years ago I started to notice a trend in Auto purchases. I noticed that I couldn't drive barely 1 mile without seeing people from an every broadening walk of life driving around in 3/4 ton diesel pickups. I couldn't help but ask myself how and why this was. These trucks cost 35-45 THOUSAND dollars. That's a house note around were I come from. Then I realized that people weren't really making so much more money right now as they were betting the farm on gut feelings that their wages would sky rocket in the near future. As time went on, this didn't happen I started to worry. Then gas prices started to march upward, and I thought well, that ought trim the market for these 3/4 ton short buses. It still hasn't happened. I am seeing more and more of these things, and now I am seeing house wifes and teenagers behind the wheel. This is why I am a little concerned that people's desire to "cling to the dream" is going to make our needed correction HAVE to be HARSH instead of gradual. No one wants their medicine, so ICU here he come.

Posted by: KP | Aug 29, 2007 10:32:28 AM

"This is in part because underwriting standards in the credit card sector have been more robust than in the mortgage industry"

This line made me laugh. I wonder why the author feels that he can make that assertion.

Recently I had HSBC calling about a late payment on a credit card. Since I don't have a credit card with them, I thought that I might be a victim of identity theft. But in talking with the rep, all they had was a PO Box for an address on the card, and they got my phone number from a web search of my metro area.

One thing I have noticed is that the card companies keep raising my credit limit. The ratio of credit used/credit available is one of the factors taken into consideration in your FICO score. If credit card companies keep raising your credit limit, they are in fact helping to improve your credit score. Note the self-reinforcing circle.

I doubt the credit card industry has been any less egregious in extending credit to bad credit risks than the mortgage industry. They are operating under the same factors: cheap credit offered by the world's central banks, huge fees for securitizing, massive demand for securitized products with their relatively high yields compared to the low rates set by the world's central banks.

KSH

Posted by: ksh | Aug 29, 2007 10:39:18 AM

Brian,

The reason for higher defaults in 2004 was likely due to individuals seeking to beat the more stringent bankruptcy requirements effective in 2005.

If you recall, the tougher bankruptcy provisions were highly publicized in the media at the time.

Here's Forbes' take on it:

http://www.forbes.com/feeds/ap/2007/08/28/ap4062210.html

Lokks like it's going to get far worse than 2004 very soon...

Posted by: Pool Shark | Aug 29, 2007 11:14:21 AM

Also, there have been some graphs showing ARM resets now kicking in, and we just hit a big spike beginning in March and peaking in September. So defaults will continue to creep up in coming months.

Posted by: New Yorker | Aug 29, 2007 11:18:08 AM

ksh,

"This is in part because underwriting standards in the credit card sector have been more robust than in the mortgage industry"

"This line made me laugh."

Wasn't it just a few months ago that BoA was working on a pilot project to extend credit to illegal aliens?

What could possibly go wrong?!

Posted by: Pool Shark | Aug 29, 2007 11:21:44 AM

Even though credit card defaults are up 30% this year, they are below where they were in 2004.

Brian,

2004 was the last full year before the tougher bankruptcy law came in. It could be a legislation blip

Posted by: DavidB | Aug 29, 2007 11:23:11 AM

Even though credit card defaults are up 30% this year, they are below where they were in 2004.

that cliff drop in the fourth quarter of '05 ought to tip you off that something extraordinary happened. and, indeed, it came after bankruptcy laws changed. that law was a slow motion train wreck and led to a massive daytime television advertising blitz by bankruptcy lawyers predicting the end of the bankruptcy escape. people scrambled to file.

Posted by: a guy called john | Aug 29, 2007 11:36:44 AM

The bottom line is that the so called liquidity sloshing around the world was nothing more than debt being compounded by the derivatives trade and various schemes...I mean conduits. Everyone needs CASH, but damned if they can find any!

Subprime inflicts new damage as banks seek cash

By Mike Peacock
Wed Aug 29, 8:06 AM ET

LONDON (Reuters) - New evidence of damage wrought by the U.S. mortgage sector surfaced in the United States and Europe on Wednesday while banks demanded a record amount of cash at a euro zone money market auction.

ADVERTISEMENT

Cheyne Finance Plc, a structured investment vehicle (SIV) managed by British hedge fund Cheyne Capital Management, said it was seeking to restructure after being forced to start selling assets to pay down debt.

Standard & Poor's downgraded Cheyne Finance sharply. Just two weeks ago, the agency said ratings on SIVs -- including the Cheyne vehicles -- were weathering turmoil caused by defaults on U.S. subprime mortgage lending mainly to poor people.

Merrill Lynch on Tuesday downgraded Bear Stearns (BSC.N) Citigroup Inc (C.N) and Lehman Brothers Holdings (LEH.N) to "neutral" from "buy" and lowered estimates for the banks' earnings, due to their credit and mortgage market troubles.

"The only thing that is certain is that more uncertainties in the direction of asset prices and volatility are on their way," Bank Julius Baer said in a report.

Euro zone banks bid for a record amount of money at the ECB's regular long-term funding operation on Wednesday, reflecting ongoing tightness in the interbank lending market.

Central banks have poured funds into money markets to tackle a liquidity crisis, stemming from the subprime saga, which has made many banks clam up on normal interbank lending.

The European Central Bank lent out 50 billion euros for 91 days to cover banks' medium-term funding needs. With banks bidding for a total of 119.75 billion euros, strong demand pushed up the cost.

"There is still a huge premium for cash particularly in the three months area," one trader said.

REAL ECONOMY DAMAGE

In terms of wider economic damage, a survey by the GfK market research group showed German consumer sentiment was likely to worsen in September due to households' concerns that market volatility may hurt the economy.

"The turmoil on financial markets has obviously had quite a negative impact on consumer sentiment, even though Germans aren't as caught up in the stock market as say the British or Americans are," said Unicredit economist Alexander Koch.

In the United States, mortgage applications fell for a second consecutive week, the Mortgage Bankers Association said.

Data on Tuesday showed U.S. consumer sentiment suffered its steepest plunge in nearly two years and a house price index posted the biggest drop in its 20-year history.

"Now the question is not so much where the losses are and how far the cancer has spread but how much of the business and consumer economy are affected," said Justin Urquhart Stewart of 7 Investment Management.

Consumer spending has driven growth in the world's largest economy.

CENTRAL BANKS WAIT IN WINGS

The turmoil has prompted investors to look for a rapid policy response from the major central banks.

A speech by U.S. Federal Reserve Chairman Ben Bernanke on Friday, on "Housing and Monetary Policy," may harden expectations of a U.S. interest rate cut, while serious doubt has been cast on the chances of a European Central Bank rate rise next week.

The ECB hold its regular monetary meeting on September 6, and the Fed follows on September 18.

Markets scaled back their expectations for an ECB increase after President Jean-Claude Trichet stressed on Monday that his last comments on monetary policy, when he used the "strong vigilance" phrase signaling a rate rise was likely, were made before the market volatility began.

ECB Executive Board member Gertrude Tumpel-Gugerell said the recent turbulence showed how rapidly contagion could spread around the world but predicted calm would return.

"I am confident that confidence will return," she told reporters on the sidelines of a conference in the Austrian Alps.

Minutes of the Fed's last monetary meeting -- held just before the credit squeeze prompted it to cut its discount rate for direct lending to banks -- showed it recognized financial market wobbles might require a policy response if this worsened.

"A further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response," the minutes said

Posted by: SPECTRE of Deflation | Aug 29, 2007 12:51:33 PM

"About 4-5 years ago I started to notice a trend in Auto purchases. I noticed that I couldn't drive barely 1 mile without seeing people from an every broadening walk of life driving around in 3/4 ton diesel pickups. I couldn't help but ask myself how and why this was."

I've seen the same here. The housing ATM seems to have been feeding this excessive consumption. I wonder how bad this party's hangover will be..

Posted by: Rich_Lather | Aug 29, 2007 1:05:24 PM