By Mick Gregory
The sub-prime mortgage meltdown has been one of the major news events of 2007. People in California with $5,000 monthly mortgage payments are just handing over their keys to the banks. But wait, there’s more.
Americans are stopping payment on their credit cards at an all-time record rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of big hits to banks with more to come.
An Associated Press (AP) report 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.
Finacial experts say these signs of the deterioration of finances of millions of American households are partly a result of the subprime mortgage crisis and could spell more trouble ahead for millions of Americans and some banks.
Timing is everything. Talk show host Dave Ramsey has seen his nationally syndicated show grow exponentially the past 18 months. He is telling listeners to cut up their credit cards and pay off those with the smallest balance first. But even before that, Ramsey says pay for your food, mortagage, car payment and sock away $1,000 for emergencies.
There are a lot of methods for trying to dig yourself out of financial problems, and this may not necessarily be the best one for you. The “Baby Steps” are, however, a very workable plan for most people. They’re simple, straightforward, and they work. Ramsey has callers every day screaming “I’m debt free!” He is attracting a following with a cult atmosphere.
“The bottom line?” asks Ramsey. “It’s easy to become wealthy if you don’t have any payments.”
The best and most-detailed version available of these Baby Steps can be found in Ramsey’s book The Total Money Makeover.
It’s like the chicken or the egg proposition. Did the banks start the credit crisis with their easy “come on” rates then turned on the juice to 30 percent of millions of customers, or was it Ramsey’s advice to stop paying these excessive fines and cut up your cards?
This was the first Christmas we didn’t use credit cards. What a nice feeling.
What are the consequences?
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 are up sharply: Some of the nation’s biggest lenders – including, 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.
The AP analyzed data representing about 325 million individual accounts held in trusts that were created by credit card issuers in order to sell the debt to investors – similar to how many banks packaged and sold subprime mortgage loans. Together, they represent about 45 percent of the $920 billion the Federal Reserve counts as credit card debt owed by Americans.
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.
Even after the recent spike in bad loans, the credit card business is still quite lucrative, thanks to interest rates that can run as high as 36 percent, plus late fees and other penalties.
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.
The trend carried into November. As of Friday, all of the trusts that filed reports for the month show increases in both delinquencies and defaults over November 2006, and many show sequential increases from October.
Discover accounts 30 days or more delinquent jumped 25,716 from November 2006 and had increased 6,000 between October and November this year.
Many economists expect delinquencies and defaults to rise further after the holiday shopping season.
Filing for bankruptcy is no longer a solution for many Americans because of a 2005 change to federal law that made it harder to walk away from debt. Those with above-average incomes are barred from declaring Chapter 7 – where debts can be wiped out entirely – except under special circumstances and must instead file a repayment plan under the more restrictive Chapter 13.
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. (COF) (COF) 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. (BAC) (BAC) 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. (AXP), Discover Financial Services Co. and those containing “branded” cards from Wal-Mart Stores Inc. (WMT), Home Depot Inc. (HD), Lowe’s Companies Inc., Target Corp. (TGT) and Circuit City Stores Inc. (CC) – 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.
The one exception in October was JPMorgan Chase & Co. (JPM)’s credit card trust, which reported declines in both delinquencies and defaults. A Chase spokesperson attributed this to its focus on prime borrowers and aggressive account management.
By contrast, Capital One executives told analysts last month that the company projected 2008 write-offs of credit card debt to be at least $4.9 billion. This projection, analysts were told, took into account growing delinquencies and potential effects if the housing market continued its downward slide.
Capital One spokeswoman Julie Rakes said the increase in delinquencies could be due to an accounting change last summer, which shortened the grace period between when statements were issued and the due date.
Capital One also reported that the number of accounts 90 days or more in arrears had increased between October and November. More than 1.2 million of Capital One’s 30 million accounts were either delinquent or in default.
Capital One is the bank that shows Vikings robbing customers of their cash. Now many of the customers get the point and are fighting back.
Many finacial pros expect this trend to accelerate in 2008 – particularly among people who took out untraditional loans whose interest rate has risen, requiring owners to pay mortgages several hundred dollars more than just a year ago.
“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.”