Tuesday, December 25, 2007

Credit Card Defaults move to Forefront of Deflation Debate

Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come.

The value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October from a year earlier at 17 large credit card trusts examined by the AP. That represented more than 4 percent of the total outstanding principal balances owed to the trusts on credit cards that were issued by banks such as Bank of America and Capital One and for retailers like Home Depot and Wal-Mart.

At the same time, defaults - when lenders essentially give up hope of ever being repaid and write off the debt - rose 18 percent to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission.

Among the trusts examined, Bank of America Corp. had the highest delinquency volume, with overdue accounts valued at $5 billion. Bank of America defaults in October were almost 200 percent higher than in October 2006.

The Current Picture

* Residential foreclosures are enormous
* Commercial real estate is heading south
* Credit card delinquencies are rising sharply
* REOs will dramatically increase once the wave of Alt-A and pay option ARMs  hits
* Ambac and/or MBIA are in serious trouble with funding
* Ambac and MBIA put municipal bond ratings in jeopardy

The current picture is not pretty nor is there anything remotely inflationary with it. It took a while, but now credit cards can be added to the growing list of problems. Rather than a single domino triggering a collapse, perhaps there is simply a sudden out of the blue implosion caused by too much debt with no possible way to service it.