The Next Shoe to Drop in This Bruised Economy

From our friend at EverBank, Chris Gaffney

What Happened:

Yesterday's NY Times had a lead article warning about how housing lenders now fear a bigger wave of loan defaults.

Homeowners with good credit are falling behind on their payments in growing numbers. This is happening even though the problems with mortgages made to people with weak, or sub-prime credit are looking like they're beginning to level off.

The article states that while it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in sub-prime loans suggests that the problems in the broader market may not peak for another year or two.

Sub-prime was just the tip of the iceberg, and since prime loans account for a majority of the US $12 trillion market, any increase in defaults in this sector will have an even more dramatic impact.

What I Say:

And the housing sector isn't the only area which is a drag on the economy. As my colleague Chuck Butler reported a couple of months ago, the next shoe to drop in the ongoing credit crisis is consumer credit cards. Consumers are getting squeezed by rising energy and food prices and falling income.

So they're turning to their plastic for everyday items. In years past, consumers were able to max out one card and move on to another. But banks have started to tighten up lending standards, and the number of offers for new cards showing up in the mail has declined dramatically.

Banks are now predicting higher charge off rates across the credit industry, much more than previously anticipated. And like the mortgage mess, these credit card loans have been securitized and repackaged to be sold out to investors. What a mess...

Average rating
(0 votes)