Gaze With Me Into The Credit Crystal Ball

[flacorps]

Buckle up folks. Rates and fees are going higher, and limits are going lower, and your credit card issuers may change (usually for the worse).

 

This month (March 2008) is the peak month for subprime mortgage resets. From here on out, the number of resets goes down. However, there is another (much smaller) wave of resets that will occur in 2009 that has to do with the pay-option ARMs, which are nominally prime.

 

These subprime resets will put unprecedented strains on borrowers, as we have already seen. Some simply walk away from the homes they purchased. Others shoulder the load and stagger forward as best they can. Still others call their lenders and wander almost endlessly through voicemaze hell trying to find the department that can help them with a workout. The head of the Fed, Ben Bernanke essentially TOLD mortgage lenders just today that they should write down loans for mortgage borrowers.

 

Those that walk away will try to keep their credit cards current. Those that shoulder the load may not be able to. Those who reach some sort of workout plan remain a question mark. The first two should worry all of us who hold credit cards.

 

The last couple of years have been incredibly loose in terms of credit card lending. Buoyed by their analyses that bankruptcies would go down and the quality of BK paper would go up, along with the wealth effect from the housing bubble, lenders have handed out credit cards like cotton candy at the state fair, and with sizeable credit lines to boot. And when the lender faced trouble in other areas, increasing those lines was a way to book additional performing loans to offset the problems.

 

A crisis in liquidity will force those lenders to pull back credit lines and increase interest rates and fees well beyond what is already becoming uncomforable for say, Amex and Juniper cardholders. Lenders can only lend a set ratio of the value of their assets ... when the asset base shrinks, they must call loans due and payable or face takeover by regulators and liquidation. The FDIC is already rehiring retirees in anticipation of 100+ bank failures.

 

For the past few months, so-called "sovereign funds" from foreign nations have been assisting some of the largest banks around the world (including Citigroup) with liquidity ... on easy terms, and with no demand to participate in management at the institutions receiving money. The Fed has revamped its credit facilities so that banks no longer come hat in hand to the discount window and get branded with a scarlet letter for doing so. But even as that happens, the crisis spreads like an ink stain ... now municipalities are having trouble floating bonds at 20% that a few months ago they could easily float at 4% because the businesses that insure the bonds are seen as shaky.

 

In short, while Ben Bernanke says to write down the loans, the banks don't really have a lot of wiggle room to do that. And when those loans go bad and take the banks with them, the folks with the credit cards are going to take it on the chin too. Back to those subprime mortgage folks' credit cards ... they're all getting ratejacked because their credit histories will be damaged, or they're getting canceled. They won't be able to pay back the debt. Some banks will fail.

 

Healthier banks will assume the performing portfolios of the failed banks, and will treat all their cardholders like second class citizens (higher rates and fees and lower limits will be the order of the day). The failed portfolios ... will go to the FDIC's "JDC"program--an outgrowth of the RTC program that was moved over to FDIC when it proved successful at the RTC back in the late '80s and early '90s.

 

What does "JDC" stand for? Well, I haven't found the source of the acronym, but "Junk Debt Collection" sounds about right. How does it work? The FDIC holds a "beauty contest" among applicants (these will be all the usual suspects like LVNV, Asset, Cavalry, etc.) to see who it thinks can collect the most. Then it sells them the debt for $.01 (one cent on the dollar), with the proviso that the FDIC gets 50% of whatever the JDB collects (the JDB must bear the costs). This is well below what junk debt usually sells for ... but the 50% kickback is unusual.

 

It's going to take perhaps a year for all of this to come completely a cropper. The borrowers take time to fail, the banks they borrowed from take time to fail, and the government takes time to step in and take those banks over, and the sales of the bad portfolios to the JDBs takes time, and the JDBs take time to analyze and get to work on those porfolios.

 

I just wanted everyone who might be missing a few puzzle pieces of the future to have them all in one post.

[flacorps]

bump

[Credit Matters]

Buckle up folks. Rates and fees are going higher, and limits are going lower, and your credit card issuers may change (usually for the worse).

 

This month (March 2008) is the peak month for subprime mortgage resets. From here on out, the number of resets goes down. However, there is another (much smaller) wave of resets that will occur in 2009 that has to do with the pay-option ARMs, which are nominally prime.

 

These subprime resets will put unprecedented strains on borrowers, as we have already seen. Some simply walk away from the homes they purchased. Others shoulder the load and stagger forward as best they can. Still others call their lenders and wander almost endlessly through voicemaze hell trying to find the department that can help them with a workout. The head of the Fed, Ben Bernanke essentially TOLD mortgage lenders just today that they should write down loans for mortgage borrowers.

 

Those that walk away will try to keep their credit cards current. Those that shoulder the load may not be able to. Those who reach some sort of workout plan remain a question mark. The first two should worry all of us who hold credit cards.

 

The last couple of years have been incredibly loose in terms of credit card lending. Buoyed by their analyses that bankruptcies would go down and the quality of BK paper would go up, along with the wealth effect from the housing bubble, lenders have handed out credit cards like cotton candy at the state fair, and with sizeable credit lines to boot. And when the lender faced trouble in other areas, increasing those lines was a way to book additional performing loans to offset the problems.

 

A crisis in liquidity will force those lenders to pull back credit lines and increase interest rates and fees well beyond what is already becoming uncomforable for say, Amex and Juniper cardholders. Lenders can only lend a set ratio of the value of their assets ... when the asset base shrinks, they must call loans due and payable or face takeover by regulators and liquidation. The FDIC is already rehiring retirees in anticipation of 100+ bank failures.

 

For the past few months, so-called "sovereign funds" from foreign nations have been assisting some of the largest banks around the world (including Citigroup) with liquidity ... on easy terms, and with no demand to participate in management at the institutions receiving money. The Fed has revamped its credit facilities so that banks no longer come hat in hand to the discount window and get branded with a scarlet letter for doing so. But even as that happens, the crisis spreads like an ink stain ... now municipalities are having trouble floating bonds at 20% that a few months ago they could easily float at 4% because the businesses that insure the bonds are seen as shaky.

 

In short, while Ben Bernanke says to write down the loans, the banks don't really have a lot of wiggle room to do that. And when those loans go bad and take the banks with them, the folks with the credit cards are going to take it on the chin too. Back to those subprime mortgage folks' credit cards ... they're all getting ratejacked because their credit histories will be damaged, or they're getting canceled. They won't be able to pay back the debt. Some banks will fail.

 

Healthier banks will assume the performing portfolios of the failed banks, and will treat all their cardholders like second class citizens (higher rates and fees and lower limits will be the order of the day). The failed portfolios ... will go to the FDIC's "JDC"program--an outgrowth of the RTC program that was moved over to FDIC when it proved successful at the RTC back in the late '80s and early '90s.

 

What does "JDC" stand for? Well, I haven't found the source of the acronym, but "Junk Debt Collection" sounds about right. How does it work? The FDIC holds a "beauty contest" among applicants (these will be all the usual suspects like LVNV, Asset, Cavalry, etc.) to see who it thinks can collect the most. Then it sells them the debt for $.01 (one cent on the dollar), with the proviso that the FDIC gets 50% of whatever the JDB collects (the JDB must bear the costs). This is well below what junk debt usually sells for ... but the 50% kickback is unusual.

 

It's going to take perhaps a year for all of this to come completely a cropper. The borrowers take time to fail, the banks they borrowed from take time to fail, and the government takes time to step in and take those banks over, and the sales of the bad portfolios to the JDBs takes time, and the JDBs take time to analyze and get to work on those porfolios.

 

I just wanted everyone who might be missing a few puzzle pieces of the future to have them all in one post.

 

Nice writeup.

[sarg]

people who use credit cards as supplemental income best find another resource

[IN_experian_CED]

And this is just what you get when your money isn’t locked to any standard at all with a group of “economists†that try to decide how best to improve growth, and prevent down turns at all costs.

 

Well, now we are seeing some of the cost…..

 

If our money was locked to gold, silver, oil, or whatever else that might be available to keep fiat money somewhere close to reality land, we wouldn’t have this problem. We wouldn’t have had most of the wars this county has been in either. They just couldn’t afford it without printing monopoly money.

 

The thing that kills me is the fact that they don’t teach near enough about the economy, or how our government works or otherwise doesn’t in the public schools. If they did, I’m almost certain in a single generation we would be rid of the Federal Reserve System; of which we rarely if ever have seen any sort of reserve or system to their madness ….LOL

 

 

....let's hope the oil producing countries don't begin to fairly price their commodity either.

 

....and there won't be any increase in exports to save us because this inflation is increasing the cost to produce.

 

 

oh well, just some thought's that have been on my mind lately as a regular joe near detroit.

 

good luck everyone

[wingwalker]

Bump

[azntg]

What a time to be alive, no?

 

Let's see how many creditors stay with me before I move permanently to heaven or hell (whichever it may be). I plan to keep just one card per each major network. Maybe once I actually have a five figure income, I might go for that one final card that breaks my current pattern.

 

Also curious to see how this'll all play out. I also plan to purchase a house with my parents once I have the stable income of a NYC public school teacher within the next 5 years (working class all the way, I won't be living in no major luxury anytime soon!)

Edited March 5, 2008 by azntg

[radi8]

If our money was locked to gold, silver, oil, or whatever else that might be available to keep fiat money somewhere close to reality land, we wouldn’t have this problem.

 

A fixed money supply in a world with non existent trade barriers would be a disaster. The gold standard worked fairly well when our trade with other countries was limited to a handful of steam ships and there were no FOREX or commodities exchanges.

Today all it would do is allow any foreign government with means and motive to take effective control of our currency through speculative attacks without any effective means to combat it. The great depression was likely worsened by an inflexible monetary supply.

[radi8]

....and there won't be any increase in exports to save us because this inflation is increasing the cost to produce.

 

The inflation in raw materials (fuel, metals etc) is a worldwide problem, most of these items are priced on an open market. Bangladesh isn't getting any secret discount on copper and oil.

[toot]

And this is just what you get when your money isn’t locked to any standard at all with a group of “economists†that try to decide how best to improve growth, and prevent down turns at all costs.

 

Well, now we are seeing some of the cost…..

 

If our money was locked to gold, silver, oil, or whatever else that might be available to keep fiat money somewhere close to reality land, we wouldn’t have this problem. We wouldn’t have had most of the wars this county has been in either. They just couldn’t afford it without printing monopoly money.

 

If the gold standard was a good idea why did every 1st world country move away from it? Locking your currency to a commidity like gold means you have a limited money supply which severly limits growth potencial. In a global economy it would be completely disasterious to the US. Since we import more than we export, what would happen after we exported all of our currency by buying imports from other countries.

 

For an economy deflation is a lot worse than inflation (at a controlled rate), which is what would happen if we moved onto a gold standard.

[radi8]

In a global economy it would be completely disasterious to the US. Since we import more than we export, what would happen after we exported all of our currency by buying imports from other countries.

 

Exactly right. It worked when most countries were self-sufficient and did relatively little trade. Today we'd have to have parity between imports and exports in order to maintain the monetary supply. Excess export would flood the monetary supply with incoming cash, excess import would starve it.

Without the ability to manipulate the money supply when necessary (and the fed really overdoes it) we'd be looking at far harsher methods to balancing our currency.

[Kevin20]

And this is just what you get when your money isn’t locked to any standard at all with a group of “economists†that try to decide how best to improve growth, and prevent down turns at all costs.

 

Well as long as we're going to peg the value of our money to some arbitrary physical commodity whose value is in turn priced in the money whose value is pegged on it (ouch), I say we use pork bellies!

[radi8]

And this is just what you get when your money isn’t locked to any standard at all with a group of “economists†that try to decide how best to improve growth, and prevent down turns at all costs.

 

Well as long as we're going to peg the value of our money to some arbitrary physical commodity whose value is in turn priced in the money whose value is pegged on it (ouch), I say we use pork bellies!

 

It's worse than that. We'd be pegging our money to a commodity that changes value with the mood of the traders.

[taxwizard]

...............To quote the patriarch of the great European banking family......Rothschild........

 

"Give me the power to control the currency of a nation and I care not who makes its laws "

[PWT]

And this is just what you get when your money isn’t locked to any standard at all with a group of “economists†that try to decide how best to improve growth, and prevent down turns at all costs.

 

Well as long as we're going to peg the value of our money to some arbitrary physical commodity whose value is in turn priced in the money whose value is pegged on it (ouch), I say we use pork bellies!

 

It's worse than that. We'd be pegging our money to a commodity that changes value with the mood of the traders.

 

can anybody say......"O-I-L" ............

[flacorps]

can anybody say......"O-I-L" ............

 

Perhaps the unit of value setting the standard for trading in the world should be kilowatt hours ... oops, Enron already tried that.

[Jen23514]

people who use credit cards as supplemental income best find another resource

 

there's a lot of them out there.

[flacorps]

In the last 24 hours I have heard the word solvency creeping in as a successor to liquidity in describing the crisis.

 

To the lay person, that's like hearing the U.S. President quote Lincoln. You don't quote Lincoln unless the country is in real trouble.

[drew3918]

And this is just what you get when your money isn’t locked to any standard at all with a group of “economists†that try to decide how best to improve growth, and prevent down turns at all costs.

 

Well, now we are seeing some of the cost…..

 

If our money was locked to gold, silver, oil, or whatever else that might be available to keep fiat money somewhere close to reality land, we wouldn’t have this problem. We wouldn’t have had most of the wars this county has been in either. They just couldn’t afford it without printing monopoly money.

 

The thing that kills me is the fact that they don’t teach near enough about the economy, or how our government works or otherwise doesn’t in the public schools. If they did, I’m almost certain in a single generation we would be rid of the Federal Reserve System; of which we rarely if ever have seen any sort of reserve or system to their madness ….LOL

 

 

....let's hope the oil producing countries don't begin to fairly price their commodity either.

 

....and there won't be any increase in exports to save us because this inflation is increasing the cost to produce.

 

 

oh well, just some thought's that have been on my mind lately as a regular joe near detroit.

 

good luck everyone

 

If you really want to get a wake-up-call, Look into who Truly Owns what we call the. " Federal Reserve System"

[nyrocks]

On the news today they showed a city somewhere in the US with a gas price of $5.29 per gallon! I was at work with the tv on mute so I didn't catch where this was.

[sdadept]

the same people saying the peak now are the ones who said it wouldn't happen in the first place. I trade a lot of the stocks/bonds around this area and I know from reading a lot of the financial reports of the companies that made these loans that they didn't start trailing them off until things were obviously starting to go bad. June/July of this year at a minimum is when they will peak. But even after that, they will still be around for at least another year (one year ago was when these things started blowing up and everyone quit making these types of loans at all).

 

otherwise, i completely agree with your analysis.

[flacorps]

the same people saying the peak now are the ones who said it wouldn't happen in the first place. I trade a lot of the stocks/bonds around this area and I know from reading a lot of the financial reports of the companies that made these loans that they didn't start trailing them off until things were obviously starting to go bad. June/July of this year at a minimum is when they will peak. But even after that, they will still be around for at least another year (one year ago was when these things started blowing up and everyone quit making these types of loans at all).

 

otherwise, i completely agree with your analysis.

 

I think we're fundamentally in agreement. The resets peak now, the immediate consequences from the resets won't peak until sometime in the summer (because it takes time for homes to go through foreclosure), and we won't be dug out of the consequences of the resets until lord-knows-when because that's a lot of housing inventory for markets to absorb (the inventory peak could well be in the fall, the winter or even later), especially when there are not a lot of lenders left standing, and those that are standing are standing because they were more cautious than a germophobe in a Bankok brothel.

 

Now because of Sarbanes Oxley, everybody's gotta constantly improve on their forecasting, so a lot of big businesses saw at least the first-order effects coming. And those businesses are hoarding cash (at the expense of employment, R&D, advertising and marketing, adding productive capacity, perhaps even maintenance).

 

That's going to reduce incomes, and that means that people are not going to be out there buying that housing inventory.

 

We're going to need a new version of the old RTC, only it's hard to see how it's going to be workable because the old RTC sold shopping centers ... of which there were relatively few compared to houses ... and for which the costs of foreclosing were a small percentage of the value of the property. Now with houses having gone bust ... the task is simply Augean.

Edited March 14, 2008 by flacorps

[CrapOneSux]

On the news today they showed a city somewhere in the US with a gas price of $5.29 per gallon! I was at work with the tv on mute so I didn't catch where this was.

 

Before we left work this morning, my co-worker mentioned it. Town begins with a "G" and is on the coast in California. Nearest town is 41 miles away and the only gas station in town is playing the game- they don't even have the price posted on a sign.

[Credit Matters]

Big Sur town of Gorda, about 35 miles north of Cambria. This is in California. And this is where gas hit $5.40 a gallon.

 

Here is a story on the place: http://www.sanluisobispo.com/183/story/304197.html

Edited March 14, 2008 by marcustx

[flacorps]

What does "JDC" stand for? Well, I haven't found the source of the acronym, but "Junk Debt Collection" sounds about right. How does it work? The FDIC holds a "beauty contest" among applicants (these will be all the usual suspects like LVNV, Asset, Cavalry, etc.) to see who it thinks can collect the most. Then it sells them the debt for $.01 (one cent on the dollar), with the proviso that the FDIC gets 50% of whatever the JDB collects (the JDB must bear the costs). This is well below what junk debt usually sells for ... but the 50% kickback is unusual.

 

I looked it up, it stands for judgments, deficiencies, and charge-offs.