Saturday, October 13, 2007

As Home Equity Debt Growth Slows – Credit Cards Pick Up The Slack

As anticipated by many as the growth in home equity slowed in 2007, the consumer moved to credit cards to pick up the slack. At this point there do not appear to be delinquency problems. Text in bold is my emphasis. From Reuters:

The automated teller for home loans is empty and Americans are relying increasingly on credit cards to pay their living costs, indicating tough hurdles ahead for U.S. consumer spending and markets.

Federal Reserve data released on Friday showed U.S. consumer borrowing rising by $12.18 billion in August, more than 20 percent more than economists had forecast.

Most striking was an 8.1 percent increase in borrowing on revolving credit lines, mostly credit cards, to a record $909 billion.

Credit card borrowings rose at the sharpest rate since early 2002. . . . .

. . . . Retail sales rose just 0.3 percent in August, and when motor vehicles and parts were stripped out, sales fell 0.4 percent, the sharpest drop since September 2006.

Considering that people always have to eat and many Americans have only limited discretion over how much gasoline they use, a period when credit card debt is expanding rapidly while retail sales are contracting points to debt financing of necessities, rather than luxuries. . . .

Ryan Sweet of Moody's notes that mortgage equity withdrawal has been down sharply on a year-on-year basis, a factor that if extended would force consumers further into the arms of their credit card lenders.

Interestingly, the market for credit card based asset-backed securities has recently become quite hot.

Credit card ABS issues in the United States is the only asset-backed segment to experience growth in 2007, up 30 percent on the year to September to $69.2 billion.

Spreads have tightened as well, after having widened considerably over the summer.

Delinquencies are still low, though the most recent data covers only the second quarter. Late payments on bank cards fell in the second quarter to 4.39 percent from 4.41 percent, according to the American Bankers Association.

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