Credit Card Delinquency Wave Reaching Tidal Force

This is a story that has been brewing for a while and we've tried to cover it when we're not tracking hedge fund portfolios. So far in 2009, the data surrounding credit card charge offs and mortgage delinquencies has not been pretty... at all. Just now after the close of the second quarter, we see that both metrics have hit the highest rates since the Federal Reserve began tracking them.

Credit card delinquencies (payments more than 30 days late) rose to 6.7% up from 6.68%. Charge-offs (listed as 'uncollectable' by the banks) rose to 9.55%, up from 7.64%. The scary thing here is that this trend is accelerating (as illustrated by the graph below, courtesy of CreditCards.com).

(Click to enlarge)

An acceleration in charge-offs and delinquencies obviously means bad things for financial institutions and the economy in general. Much like the impending (and already current) problems in commercial real estate, we've likened credit card charge-offs as a 'second wave' in this economic crisis. The first tidal wave came through and washed out a whole lot in the economy. As people begin to lose work and fall behind on their massive debt repayments, they drown. This creates a second wave of writedowns for financial institutions and another set of problems for an economy trying desperately to recover. The initial tidal wave hits and knocks America down. Then, when America starts to get enough strength to stand up, they will be washed away again with a whole new slew of problems.

This is due to the delayed effect the first wave had on the consumer. After people are laid off, they scramble to find new jobs and dwindle what little savings they have left. (Remember, America's savings rate has not been the best and we've concluded that it needs to rise in order to help get out of this mess). And, the fact that the unemployment rate keeps rising is not helping things either. Once their savings is gone, they rely on credit cards as a flotation device. And, this scenario is only the people who don't already have credit card debt. Those already suffering under this burden begin to bear an even heavier load until they simply can't make payments at all.

This effectual lag has slowly but steadily been building for months and the latest charge-off and delinquency data has begun to spike. In fact, we started posting about rising delinquencies back in August of 2008 when we saw delinquency rates starting to near 5%. We then touched on the impending credit card squeeze back in November as well, as we began to look at things in-depth. Nowadays, charge-offs are nearing 7% and in the span of one year we've seen a surge in credit card delinquencies of almost 2%. This just begins to show the lagging effect this phenomenon will have.

So, this is nothing new. Charge-offs and delinquencies are accelerating and even the CEO of JPMorgan (JPM) Jamie Dimon himself says that consumer loans and credit cards will be a house of pain for financial institutions. Well, he should know since his firm is in the eye of the rising storm. As such, we penned a piece announcing our downgrade of the American consumer's credit rating where we examined the potential impact of credit line reductions.

The main thing to take away here is that credit card charge-offs and delinquencies are getting pretty bad and have the potential to go to 'worse.' The lagging effect of these charge-offs and delinquencies cannot be overstated as these problems slowly fester. Too many consumers have been struggling and now find themselves caught in the undertow; the wave has been building for some time now. The only questions now are how big will it get and when will it crash down?

Comments

[John Bowman:]

I hate to think what happens after the extended unemployment benefits expire for the first wave of the jobless in the first quarter of 010, and their inability to pay their credit card bills coupled with no savings. What will these people be left with just to survive?

Aug 19 08:44 AM

[Per:]

It's heartbreaking as all this predatory credit card companies have been preying on weak consumers for years; offering them 0% to get them sucked into a life in debt with no chance to pay back.

I had to get on the "do not mail list" to get all these promotions to stop coming into our household. There has to be regulations to prevent this from happening as it ends up being us tax payers that have to foot the bill in the end of the day.

Next wave will be brutal as credit card debt is the most illicit of any debt, accelerating with 15-20% per year. Cash is king and soon - as in Argentina - we'll get a discount if paying with cash versus credit cards. I got 10% off when I serviced my car a few months ago as I paid with cash.

The only way to survive this gargantuan storm is to stop consuming, paying off all debt and focus on creating positive cash-flow. Any buying of assets over the next 2 deflationary years is insanity.

Aug 19 09:26 AM

[The Geoffster:]

...and this from Bloomberg, "Falling Credit-Card Defaults Suggest Recession May Be Ending "www.bloomberg.com/apps...

Aug 19 09:35 AM

[MudEngineer:]

Financial stocks have gone up as much as 400% in 5 months and you read the article above and still want to stay long JPM. You are living in a world of hope just like the people who ran up these stocks! The real world just does not support the banks going even higher from here. Good luck with your JPM purchase and maintain some tight stops. You are going to need them.


On Aug 19 08:28 AM JosephN wrote:

> I have read that credit card defaults in july are actually down across
> the board for Citi, BAC and especially JPM. I believe JPM is actually
> poised for quite a pop up when the good news about 3rd quarter earnings
> are released.
>
> (long JPM)

Aug 19 09:54 AM

[The Greates...:]

Americans as a class are broke. What the savings rate more accurately measures is a collapse of consumer spending.
Is it any wonder that once that system collapsed that we quickly gave up 100% of the phantom job growth that had been sitting on top of the debt bubble? The current level of employment in the United States has now returned to the levels of June 2000. Enough said.
www.econbrowser.com/ar...

Aug 19 10:07 AM

[Pat Shuff:]

People who spend too much end up being owned by the thrifty. It is the government's role to prevent that by progressively redistributing the flows, ending up owning both.

Aug 19 10:23 AM

[The Geoffster:]

The increased savings rate is not showing up as savings; rather, people are paying down debt. Good news for the insolvent banks but not good enough prevent another bailout.

Aug 19 10:30 AM

[conceptwizard:]

The companies that had the tightest restrictions on credit cards with reap the benefits from this turndown like JPM. On the other hand CITI has been increasing in defaults. It falls back on the lending policies of the individual companies for the most part. Overall all types of financial products are under duress. Credit cards are only the tip of the iceburg.

And don't forget the banking system is still broken. Not a dime from the $700 billion TARP bailout was used to purchase toxic assets. The banks are still drowning in red ink.

Toxic assets, falling home prices, widespread malaise in the credit markets are just part of the problem. The deeper issue is the dismal condition of the US consumer who has seen his home equity dissipate, his retirement funds sawed in half,his access to credit curtailed, and his job put at risk. Ordinary working class Americans now face what David Rosenberg calls, "the era of consumer frugality---new paradigm of savings, asset liquidation and debt repayment ." Life styles will have to be toned-down and living standards lowered to meet the new deflationary reality. More and more people will be forced to jettison their credit cards and live within their means.

Aug 19 01:31 PM

[John Bowman:]

Yes, but that means living below the Joneses. What a horrid thought :)


On Aug 19 01:31 PM conceptwizard wrote:

Life styles will have to be toned-down and living standards lowered to meet the new deflationary reality. More and more people will be forced to jettison their credit cards and live within their means.

Aug 19 03:00 PM

[Old Trader:]

Not necessarily, the "Smiths" can place their cardboard box right NEXT to the "Jones" and form a "duplex".


On Aug 19 03:00 PM John Bowman wrote:

> Yes, but that means living below the Joneses. What a horrid thought
> :)
>
> Life styles will have to be toned-down and living standards lowered
> to meet the new deflationary reality. More and more people will be
> forced to jettison their credit cards and live within their means.

Aug 19 07:37 PM

[wheelbarrel...:]

LOL sure - from the article;
Bank of America Corp., which has the highest default rate among the biggest U.S. card issuers, said its write-offs rose to 13.82 percent in July from 13.81 percent in June.

Capital One Financial Corp., the third-biggest issuer of Visa credit cards, reported a monthly increase in managed defaults, which climbed to 9.83 percent in July from 9.73 percent.




On Aug 19 09:35 AM The Geoffster wrote:

> ...and this from Bloomberg, "Falling Credit-Card Defaults Suggest
> Recession May Be Ending "www.bloomberg.com/apps...;sid=a7og.1x7TVcQ

Aug 22 11:46 AM

[wheelbarrel...:]

Now he is up 410% LOL this market is insane


On Aug 19 09:54 AM MudEngineer wrote:

> Financial stocks have gone up as much as 400% in 5 months and you
> read the article above and still want to stay long JPM. You are living
> in a world of hope just like the people who ran up these stocks!
> The real world just does not support the banks going even higher
> from here. Good luck with your JPM purchase and maintain some tight
> stops. You are going to need them.

Aug 22 11:47 AM

[ManAboutDallas:]

If you believe the manufactured tripe of Bloomberg, you must still be leaving cookies and milk out for Santa Claus, the Easter Bunny, and the Tooth Fairy. Good on 'ya, Tinkerbelle.


On Aug 19 09:35 AM The Geoffster wrote:

> ...and this from Bloomberg, "Falling Credit-Card Defaults Suggest
> Recession May Be Ending "www.bloomberg.com/apps...;sid=a7og.1x7TVcQ

Aug 23 07:48 AM

[RATHER FISH:]

It's a farce, if you loan people money no questions asked and they don't /can't pay you back shame on you. Now the lender wants to bury the borrower into the ground with no chance of being it back.

THESE lenders are the smart ones "YA RIGHT GO FIGURE"

Aug 23 01:50 PM

[E Nuff Sed:]

This old news, like the imminent collapse of commercial real estate market.

The smart money has already figured out that CC charge-off are peaking. Quality Issuers like COF/AXP are already expecting 10% charge off's for 2009.
(Source: Morningstar) and this has been incorporated into the valuation models.
Sub-prime issuers like BAC, CCRT are expecting 15 % charge off's. Advanta is out of business and in run-off mode.
Stock prices of COF and AXP have quadrupled and when the rates actually start to decline - they will double again.

Aug 23 08:46 PM

[Moon Kil Woong:]

Since it is easier to not pay your mortgage, demand refinancing, and walk away if you are underwater than it is to walk away from your credit card delinquencies under bankruptcy law (thanks to credit card lobbyists oftentimes you can't absolve this loss in bankruptcy filings) a rise in credit card delinquencies really represent the final capitualation for many people trying to keep their financial lives from a complete meltdown. This will undoubtedly represent a whole new wave of bank losses and foreclosures starting fall.

As mentioned by commenters, it is much harder to play accounting games to cover this loss. Even mark to fantasy can't be used to cover the hole in banks balance sheets from these losses since they must be disclosed and reserves for defaults must be accrued immediately. Therefore, banks are likely to hold even tigher to the free government money they have already been given. Undoubtedly sooner or later they will clamor to get Congress to write a bill to help bail them out for this mess too under the guise of helping credit card holders get credit easier (TARPfor credit card holders). Don't be fooled yet again. Vote no on such an issue. Like TARP none of it will actually reach the consumer.

As I mentioned before, any signs of recovery aren't coming from consumers but only from the government to those closest to the government. The rest of us are laid out to bake in an economic desert.

Aug 24 01:14 AM

[Living4Divi...:]

Moon - this is simply amazing.

By law, one can default on housing debt, but not on credit card debt. In some countries, mortgage debt is not so easily dischargeable, the debtor. The opposite is true in the US. This is written as the laws of the land. What this says is:

"To society: Credit Card Debt is more important than mortgage debt."


On Aug 24 01:14 AM Moon Kil Woong wrote:

> Since it is easier to not pay your mortgage, demand refinancing,
> and walk away if you are underwater than it is to walk away from
> your credit card delinquencies under bankruptcy law (thanks to credit
> card lobbyists oftentimes you can't absolve this loss in bankruptcy

Aug 24 07:58 AM

[Philly Jim:]

Credit cards and stimulus funds are the only thing keeping the world out of depression right now. Credit lines are being cut, interest rates rising, balance transfer fees rising, equity lines closing and mortgages becoming extinct. How is America suppose to finance the world's growth? It can't! China must allow its currency to rise next year, which will encourage its neighbors to allow their currencies to rise, and they will learn to consume their own products. The thing that scares me about Asia right now, is the amount of debt consumers are ringing up on speculative investments like stocks and property and even cell phones that are more than their monthly salaries in some countries. There could be a financial crisis in Asia mid 2010-2011.

For the idiots out there like President Lula of Brazil who blame U.S. consumers for crashing their party, they should realize that it was the U.S. consumer's spending binge which allowed the third world to become the developing world.

Sep 15 09:34 PM

[Central Har...:]

No.

Savings is defined as earnings minus consumption. If you earning it and don't consume it, it shows up as savings, whether you leave the money in your savings account, invest in stocks, or pay down debt.


On Aug 19 10:30 AM The Geoffster wrote:

> The increased savings rate is not showing up as savings; rather,
> people are paying down debt. Good news for the insolvent banks but
> not good enough prevent another bailout.

Oct 05 06:47 PM

[Central Har...:]

Partially right -- Chase does have unusually low delinquency rates (though not as low as Amex). However, your use of Citibank as an example of a firm being punished for lax lending is a bit off. Their current 30 day delinquency rate is below average and decreasing. The real loser on this one is Bank of America, and Cap One doesn't look so good either.


On Aug 19 01:31 PM conceptwizard wrote:

> The companies that had the tightest restrictions on credit cards
> with reap the benefits from this turndown like JPM. On the other
> hand CITI has been increasing in defaults. It falls back on the lending
> policies of the individual companies for the most part. Overall all
> types of financial products are under duress. Credit cards are only
> the tip of the iceburg.
>
> And don't forget the banking system is still broken. Not a dime from
> the $700 billion TARP bailout was used to purchase toxic assets.
> The banks are still drowning in red ink.
>
> Toxic assets, falling home prices, widespread malaise in the credit
> markets are just part of the problem. The deeper issue is the dismal
> condition of the US consumer who has seen his home equity dissipate,
> his retirement funds sawed in half,his access to credit curtailed,
> and his job put at risk. Ordinary working class Americans now face
> what David Rosenberg calls, "the era of consumer frugality---new
> paradigm of savings, asset liquidation and debt repayment ." Life
> styles will have to be toned-down and living standards lowered to
> meet the new deflationary reality. More and more people will be forced
> to jettison their credit cards and live within their means.

Oct 05 06:51 PM