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Next shoe to drop - why credit troubles will continue?

Thu Dec 6, 2007 02:12PM | By Tony

See more in Economy | Permalink | Email | Comments (0)

We know that credit card debt troubles will blow into our faces sooner than later. The trouble is no one wants to hear that. I can simply see the number of people searching for payday loans has increased by about 15% in last 2 months as the number looking for payday loan alternatives.

The reason is simple - consumers are getting very close to the point where all the resources that have and which helped to propel and sustain economy, are dwindling to almost zero. Home equity line of credit allowed for millions of homeowners to pay for toys which otherwise were completely out of reach. It was also served as debt consolidation loan.

But used and abused, the lines of credit are about to explode. According to Minyan Peter, the alarming 16.5% 60 day delinquency statistic reported by Moody’s last week on home equity credit nationwide at the end of June adds to the very sad fact that many home equity lines provided credit up to 110% of a home’s value at peak valuation.

So with the deflation in home prices the line of credit are becoming totally unsecured junior mortgages, threatening many banks with great losses - if unsecured credit card losses levels are running close to their 4.00% 60+ day delinquency rates, what does this suggest for home equity loans with their current 16.5% 60+ day delinquency rate?

Another brewing mess is municipal credit. Structured investment vehicle or SIV problems are looming a large property tax shortfall. Whether it is a function of home borrowers’ inability to pay or borrowers’ ability to pay lower taxes due to successful assessment appeals (lower property tax payments due to lower home values), I believe local and state municipalities are in for a very hard time. And without serious, immediate cuts in services, municipal debt ratings are likely to fall.

Finally, there is a problem of hedging and/or counter swapping with counter swaps covering everything from future of interest rates to the future of GMAC debt - where money is owed to one counterparty from another based on what happens in the future. That is exactly why freeze on mortgage rates will hurt the investors and institutions which bet on the rate increase.

Whole thing is rather messy ...

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