Credit Card Delinquency / HELOC Freeze / Ambac Bailout
A: Ahhhh, nothing like a good bond insurer bailout rumor to save the day for wall street! Funny, how every rally these days is rooted either from a bailout rumor or a fed rate cut rumor; solid stuff! Anyway, I had a conversation with a family friend a week ago who recently LOST HER LINE OF CREDIT on a HELOC, but I didn't put much thought into it until CR's post today. All this stuff really means something and it begs a larger question: If the credit crunch is exactly that, a tightening of credit availability and access to credit, how is that going to allow people to buy buy buy?
First, lets discuss the Ambac rumor very quickly as its 20 hours old news right now. A consortium of banks are reportedly going to announce a cash injection of $2-$3 billion to help Ambac maintain its AAA rating! YAYYYYYY, all our problems are now solved and housing will go up again and all these CDO's and other structured credit products are going to go up in value now! Umm, no! This doesn't solve anything other than delay the inevitable losses from being booked, and will buy Ambac some time until the next round of capital injections becomes necessary to maintain credit ratings again. Its clear the banks have a choice:
1) either team up and cough up capital to hold off a ratings downgrade and book 'X' amount of losses...OR
2) don't do anything, let the insurers get downgraded, and book 'X + X' amount of losses and deal with the negative effect on their corporate stock prices and residual effects that this will bring to overall market sentiment/losses and investor appetite for future risk taking
It's clear #1, the option that has less negative results, is the preferred route and the likely route. In the end, the losses will still be booked and the toxic holdings are still toxic. I look forward to this tentacle of the credit beast being cut off though.
Credit cards! Hey America, you have a spending and credit card problem! No news here. Did we really think this game would go on forever, honestly? According to CardTrak.com, credit card delinquency rates are up 100 basis points in the past 12 months alone; the chart on the right shows this! Our fascination with spending using credit when income doesn't afford the same luxuries is a ticking time bomb when a credit crunch hits home.
Credit card debt WAS securitized on wall street just like subprime mortgage debts were! According to an article from The Center For American Progress:
As borrowing in the mortgage market slows, credit card borrowing is accelerating—a dangerous trend because borrowers still face weak income growth. That means the credit card market could eventually run into the same problems that now afflict the subprime mortgage market.Which brings me to what is really going on in today's world if your head is not in the sand; tightening of available credit! What is it this time? Banks are starting to YANK Home Equity Lines Of Credit! So, lets say you have a $50,000 HELOC, and used $25,000 for home renovations and wanted to use the remaining funds for something else. Well, that available $25,000 is now at risk of being YANKED! According to The Washington Post (via Calculated Risk):
The lending industry that no longer aggressively issues subprime mortgages continues to aggressively market credit cards, especially credit cards with subprime-like lending terms, such as a variety of higher fees that are poorly disclosed.
Increased defaults could unravel the $915 billion in securitized debt backed by credit card receivables, just as delinquencies in the housing market unraveled the $900 billion in mortgaged-backed securities. Just like mortgage-backed securities, credit card debt is packaged and sold to investors. An increase in defaults could lead to losses not just for the credit card lenders, but also for pension funds and investors who bought the debt.
Several of the nation's largest lenders, along with smaller ones, are shutting off access to home equity lines in areas where home values are declining. It's an unusually aggressive move as the industry grapples with fallout from the mortgage crisis that began unfolding last year.So, in clear conscious thought, how in the world can anyone possibly start to discuss a recovery when access to credit is being restricted? How much tighter will access to credit get as more losses are booked by banks & brokerages; we know there is more to come? And as credit gets tighter, even tighter than where we are right now, how in the world are consumers supposed to continue leveraged/credit spending?
Countrywide Financial, the nation's largest mortgage lender, suspended the home equity lines of 122,000 customers last month after reviewing their property values and outstanding loan balances. The company, like others, has an internal automated appraisal system that tracks values.
USAA Federal Savings Bank froze or reduced credit lines for 15,000 of its customers, including Corazzi, and will not reconsider its decisions until "real estate values improve substantially," the company said in a statement.
Bank of America is starting to do the same and is contacting some borrowers, said Terry Francisco, a bank spokesman.