The next wave of defaults: Credit cards and home equity

Posted Aug 5th 2008 2:05PM by Douglas McIntyre
Filed under: Consumer Experience, Economic Data, Housing, Recession

Now that analysts have figured out that the credit crisis is moving from subprime to prime borrowers, the economic detective squad has begun to look for what's next. Turns out they don't have to look much further than the same consumer who cannot afford his mortgage.

According to The Wall Street Journal, "Rising defaults on credit-card payments, coupled with a bleaker economic outlook, are spooking investors in the market where this debt is packaged and sold." The result is a double-edged blade. Banks that hold these packaged securities will have to begin to write them down just as they did mortgage-backed paper. And consumers will find credit harder to come by because banks do not want more write-offs.

The consumer will have lost one of his last places to find cash, and banks will face more losses and the risk of having to raise additional capital. Since credit has driven consumer spending, the retail industry may be in for another shock.

The other part of the credit market that is headed toward the toilet is home equity loans. It has the same risks for banks that mortgages do. It has the same effect on consumers. They cannot tap something which no longer has value to get more cash.

All of this is to say that whatever hope the economy and banks had of recovering this year is gone. Even the first part of 2009 may be a mess. The dominoes are falling that way.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Tags: credit cards, credit crunch, CreditCards, CreditCrunch, inthenews, recession

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Reader Comments (Page 1 of 1)

8-05-2008 @ 3:53PM

David Huston said...

Whatever happened to the $56 Trillion in outstanding Credit Default Swaps? Did that (somehow) end happily ever after?

8-05-2008 @ 4:11PM

Dan Barnett said...

Sheldon Liber was writing about the banks monkeying with the HELOCs several months ago. Terms can be changed without notice & I can only hope we get the kids college bill paid before they block any further use of mine.

8-06-2008 @ 6:54AM

HARRY said...

THE NEXT BIG PROBLEM NOBODY IS CALLING FOR: CAR OR TRUCK LOANS THAT DON'T GET GOOD MPG. MOST PEOPLE ARE UPSIDE DOWN ON THEIR LOAN BECAUSE OF DECREASE IN VALUE OF THEM. I THINK A LOT OF PEOOLE WILL DEFAULT, ONLY WAY TO GET RID OF SOMETHING THEY CAN'T AFFORD TO BUY GAS FOR.