First mortgages and now Credit Cards

If you think you are in good shape with the current housing market slump. Think again.

Credit Card companies are the next to feel the heat....and turn it up on you.

After reading a blog by
JOHN PARTRIDGE
Globe and Mail Update
September 29, 2008 at 4:51 PM EDT

John says,

So far, credit-card “charge-offs” – debts declared irrecoverable by card issuers – have been “defying gravity,” with losses lower than in both 2001 and 2005, Mr. Larkin said.

But, historically, after a time lag, irrecoverable credit-card debt has followed mortgage charge-offs up or down, and U.S. mortgage charge-offs have rocketed up eight-fold since the last quarter of 2007.


He sites Innovest's senior banking analysts Gregory Larkin...

“If history is any indicator, there should be an equivalent surge in credit-card charge-offs very soon,” he said. “We forecast first quarter credit-card charge-offs will be $18.6-billion (U.S.) and that the total 2009 charge-off bill will add up to $96-billion.”

IT'S ALL TIED TOGETHER.

Banks used to lend anyone money for a home loan. Those same banks also used to pass out credit cards like they were trick or treat candy.

Those same banks that used to lend to people with 500 fico score and give out 15k credit cards to sub-prime individuals are feeling it now.

It was bound to happen. They were taking a gamble for many years and winning. Talk to a mortgage broker sometime about the good old days. They won't shut up. They could make 5 grand off of a 100k loan and everyone involved was happy. Lender, Broker and borrower.

Things have changed. That borrower all of a sudden can not keep up the payment that they got into. Surprise Surprise. THEY HAD A 500 Fico in the first place.

So the guy defaults and isn't paying on his 100k house. So now the bank has a house that they can't get rid of for 80k now that there are so many other foreclosures driving house values down.

So the bank is now sitting on what they thought was 100k, which isn't worth 70k. Now they have to hold on to there money to cover there ASSets.

So the banks hold the money. Now they aren't as likely to lend you out money on a credit card or home loan because....THEY AIN'T GOT IT. (bad English for emphasis)

So who is affected...YOU. There isn't as much money in the banks to lend out. Here is where it gets even scarier. You know things are bad if they don't lend John Doe consumer money, that's fine. But now the banks are not lending each other money..

It's a big game of "Go fish" The banks aren't willing to lend money to other banks because they aren't sure if they are ever going to see it again.

Less money available means lower spending limits on credit card for you.

Recession Wave Two has been spotted off shore and is headed this way....