Another shoe to drop: Bad credit-card debt could be next shot to economy, researcher says

[marmar]

from MarketWatch:



Another shoe to drop
Bad credit-card debt could be next shot to economy, researcher says
By Jennifer Waters, MarketWatch


CHICAGO (MarketWatch) -- Credit-card debt is on the brink of imploding and will be the next storm to hit the fragile finance industry, an investment research firm predicted this week.

According to Innovest StrategicValue Advisors, banks will charge off $18.6 billion in delinquent credit-card accounts in the first quarter of 2009 and $96 billion in all of 2009, more than double the research firm's forecast for all of this year.Innovest projects that amount would be high enough to damage some of the biggest card issuers.

Credit-card charge-offs are "defying gravity" when compared with the problems in the mortgage market, according to Gregory Larkin, senior banking analyst for Innovest. But that will change as they catch up with mortgage charge-offs, which have spiked eightfold since the third quarter of 2007.

"If history is any indicator, there should be an equivalent surge of credit-card charge-offs very soon," he said, though he concedes that an eightfold increase would be very aggressive.

Comparatively, charge-offs reached $4.2 billion in the first quarter of this year and $3.2 billion in the same period a year before, according to the Federal Reserve, which only reports non-securitized debt. Innovest's projections include all credit-card debt, which the firm believes is double what the Federal Reserve reports. For all of 2007, charge-offs tallied $26.6 billion, according to Innovest's calculations, and the firm estimates they will reach $41.5 billion at the end of this year.

The jump in credit-card charge-offs is linked in part to the credit crisis now in play. As banks have tightened lending standards, they have mostly done away with the once-popular roll-over options -- usually at 0% introductory rates -- that allowed borrowers with delinquent accounts to get new cards elsewhere. Larkin believes all that bad credit is going to surface quickly and could have a similar impact as the mortgage crisis has had on banking. ......(more)

The complete piece is at: http://www.marketwatch.com/news/story/bad-credit-card-debt-could-next/story.aspx?guid=%7BDE0C0B15%2D4760%2D491C%2DA0F4%2DD34CBD96F7B7%7D

[depakid]

1. A key difference is that credit card debt isn't securitized

[closeupready]

3. Yes it is.

n/t

[depakid]

6. You're right- my mistake. Duh. But not quite in the same way

Credit card receivables

Securities backed by credit card receivables have been benchmark for the ABS market since they were first introduced in 1987. Credit card holders may borrow funds on a revolving basis up to an assigned credit limit. The borrowers then pay principal and interest as desired, along with the required minimum monthly payments. Because principal repayment is not scheduled, credit card debt does not have an actual maturity date and is considered a nonamortizing loan.<2>

ABS backed by credit card receivables are issued out of trusts that have evolved over time from discrete trusts to various types of master trusts of which the most common is the de-linked master trust. Discrete trusts consist of a fixed or static pool of receivables that are tranched into senior/subordinated bonds. A master trust has the advantage of offering multiple deals out of the same trust as the number of receivables grows, each of which is entitled to a pro-rata share of all of the receivables. The delinked structures allow the issuer to separate the senior and subordinate series within a trust and issue them at different points in time. The latter two structures allow investors to benefit from a larger pool of loans made over time rather than one static pool.[

[closeupready]

7. no problem.

:) I'm familiar with how these deals are done, as I used to be tangentially involved.

[tularetom]

2. No bailout for those who got in too deep with credit cards

[Stellabella]

5. Do you have any idea who really uses credit cards?

Have you ever faced an impossible pile of bills, particularly bills for a health crisis, lost a job, or had an unexpected expense that had to be met?

Sheesh. Not everybody who has credit card debt is using it to buy fancy mirrors and jewelry.

[tularetom]

8. I wasn't advocating "no bailout" merely opining that the powers that be

would somehow not be able to see their way clear to bailout Joe Sixpack when he gets in a wringer with credit cards.

I've been fortunate (knock on wood) to be able to avoid credit card debt but we have family members in deep shit right now due to loss of jobs so I understand and empathize with those who face this problem.

Sorry for the misunderstanding. I should have stated my position more clearly.

[Stellabella]

15. Don't worry about it.

I have some kneejerk repuke family members who think anybody who has credit card debt is a lazy slacker. Makes me mad.

:hi:

[Greyhound]

10. That's why they got the "Bankruptcy Reform Act", to protect the credit

card companies from taking the losses they set themselves up for.

"Anything is too much for people, nothing is enough for our contributors." - your "representative"

[alstephenson]

11. Yep. eom

[femmedem]

4. What do they expect when they jack your credit card interest rate to over 30% if you're at all late?

They see a person in trouble, they make it impossible for that person to ever pay that debt off.

[spin]

12. Credit cards companies bypass usury laws...

For hundreds of years, societies all over the world have protected borrowers by limiting interest rates charged by lenders.

But in today's credit card market, American borrowers are on their own.

**************************snip*************************

Most major credit card issuers are based in states without usury laws and without interest rate caps on credit cards. Banks and credit card issuers based in these states can charge any interest rate they wish -- as long as the rate is listed in the cardholder agreement and the borrower agrees.
http://www.bankrate.com/brm/news/cc/20020320a.asp

We elect people to represent us in Congress. It's fairly obvious that they represent the big corporations and financial institutions first. We have become a country of the corporations, by the corporations and for the corporations.

Credit card companies are the modern equivalent of the "company store"

Some older posters may remember the Tennessee Ernie Ford song, "Sixteen Tons".


The chorus:
You load sixteen tons, and what do you get?
Another day older and deeper in debt.
Saint Peter, don't you call me, 'cause I can't go;
I owe my soul to the company store...

[femmedem]

14. I used to sing that song all the time in the car! My ex and I would sing it in harmony..

Some people say a man is made out of mud.
A poor man's made out of muscle and blood.
Muscle and blood and skin and bones
A mind that's weak and a back that's strong.

Well, there's a lot of strong minds out there too. But I still love that song.

[TexasObserver]

9. Who would think issuing credit cards to college students could go wrong?

[spin]

13. Consider it part of their education...

After their college experience with credit card companies, they may learn a valuable lesson and pay off their credit cards every month.

[OakCliffDem]

16. The majority of people I know could not possibly pay off their credit card bills

It is going to burst one day, and that day seems to be just around the corner