Credit Crunch: Second Wave

[uncle_monty]

http://business.timesonline.co.uk/tol/busi...icle4322121.ece

As I've always feared, mortgage collateral would not be the only assets to suffer. I have observed arrears for UK credit card securitisations steadily rise over the last 8 or 9 months. And yet we still have queues round the corner / through the night for iphones and the like!

Grim news indeed for prospects over the next few years.

Monty

Fears grow of a global plastic meltdown

Experts fear the western world’s mountain of debt on credit cards is about to crack under the strain

(David Bebber)

Iain Dey

TERRY DONOHOE arrived for work at 10am on Friday morning. By 11am the 41-year-old debt adviser had spoken to seven different people, all battling with huge credit-card arrears.

“I’ve just spoken to one guy who has £22,000 on five different cards,” said Donohoe, one of some 400 helpline advisers who work at the Consumer Credit Counselling Service’s headquarters in Leeds.

“He was only earning £12,900 a year as a part-time hospital porter. It would take him about 30 years to pay that off.”

Donohoe fields 3,000 calls a year from all over the UK. He sees evidence every day that credit-card debts are increasing. Soaring fuel costs, rising food prices and climbing energy bills are all being kept at bay with credit cards. Shortfalls on mortgage repayments are also being made up with cash from credit cards. Many of these debt-soaked consumers were already struggling to make their minimum monthly repayments.

More than $1 trillion (£500 billion) is held on credit cards in America. In the UK, debts of more than £50 billion have been run up on the plastic. Across the world, somewhere between $2 trillion and $3 trillion is owed on credit cards.

Up to now, the credit crisis has passed by without plastic going into meltdown. Statistics have shown steady levels of arrears, and suggested that many consumers have been successfully paying off part of their balances.

Now there are increasing signs that this last breakwater, shoring up the economies of the western world, is about to crack under ever-increasing strains.

“One of the indicators we watch very closely is unemployment as historically that has been quite closely correlated with deterioration in performance on credit cards,” said Anthony Jenkins, chief executive of Barclaycard.

“Right now the employment situation in the UK seems to be relatively stable, but we’re obviously watching it carefully.”

News last week from Britain’s biggest housebuilders tells a different story, with Barratt, Persimmon and Taylor Wimpey all announcing thousands of job cuts. Industry estimates suggest the total number of unemployed brickies, plasterers and plumbers will hit 60,000 within a few short months. That comes in addition to the thousands of jobs that have already been lost in the City.

Analysts always say that “the markets get it right”. Current market prices suggest that more than 20% of the money owed on British credit cards is unlikely to be paid back. That would be almost three times higher than the previous record for bad credit-card debts, eclipsing the problems witnessed in the last housing crisis of the early 1990s.

“We are already hearing stories about people using their credit cards to keep up with their mortgage payments,” said Peter Crook, chief executive of Provident Financial, the door-to-door moneylender. “If that’s what’s happening, it’s a big red warning sign.”

The recent Bank of England credit- conditions survey revealed that banks were surprised by the level of bad debts run up on their credit cards in the second quarter of the year. Demand for credit cards also increased as banks tightened their lending criteria across the board.

Provident Financial has been inundated with requests for its Vanquis credit card, even though it charges a whopping 39.9% annual interest rate — more than double the industry average. The card is targeted at sub-prime consumers, and priced accordingly. Yet “prime” customers are washing up at Vanquis after being rejected elsewhere.

The UK’s debt-strapped consumers currently owe a staggering £56 billion on credit cards. According to figures from Apacs, the payments network that supports the British banking system, this could climb to £160 billion if those 31m cards are used to the max. The figure takes account of all the measures already taken by credit-card issuers to clamp down on borrowers by rejecting card applications and cutting credit limits.

With that £100 billion cash pile, Britain’s credit-card holders would have enough money to buy Barclays, HBOS, Lloyds TSB, Royal Bank of Scotland and get about £20 billion change. On one level, this provides reassurance as it suggests that consumers still have some spare capacity in their finances. If the economy is destined for a prolonged recession, however, it is simply storing up the problem.

“Credit cards are definitely going to be one of the next big problems,” said Steve Nuttall, head of the financial-services research group at polling company YouGov. “Our research shows that everything started to fall off a cliff in about March or April and that should begin to show up in bad-debt charges by the end of the year.”

YouGov’s research suggests that 15% of the British public is now behind on at least one bill of some kind or another. Of those in trouble, 38% say they are behind with utility bills or council tax, while 31% cite credit cards as their big problem.

Problems in credit-card debts have the potential to send a new wave of panic through global financial markets.

Roughly $600 billion of debts run up on credit cards around the world are swilling through the global financial system.

Credit-card debts were packaged up and sold on by banks during the boom years, just like mortgages, car loans and the multiple billions of debt used to fund large private-equity deals.

For the banks, it was a cheaper way to lend money to consumers at competitive interest rates.

The debts owed on thousands of credit cards were swept together and placed into a large bond, off the bank’s balance sheet. The pool of credit cards was then cut into slices, based on the likelihood that the credit-card company would get its money back.

Other banks bought the best slices, which represented the money the credit-card company expected to be paid back, no matter what. The riskiest slices, which would be hit first if customers started missing their debt repayments, were sold to racy hedge funds.

Investors were falling over themselves to buy the paper in the good times. For card companies such as MBNA and Capital One, this was the prime source of funding behind all those unsolicited credit-card offers that fell through letterboxes across the country until last summer’s crisis began to bite.

Even if you are a Barclaycard customer, there is a 50-50 chance that your monthly credit-card repayments end up flowing through to a pension fund in the Netherlands, a regional bank in Germany or a specialist credit fund in Mayfair.

“There was strong demand from investors for all this paper,” said a senior banker at one large British high-street lender. “We ended up issuing twice as much credit-card debt through securitisation as we originally intended because the demand was so high.”

While every other type of complex credit vehicle has gone out of fashion, American credit-card bonds are still doing a roaring trade.

In spite of the extensive problems in the US economy, almost $43 billion of credit-card debt was sold to financial investors as securitised bonds in the first six months of 2008, according to recent research by Citigroup — stretching ahead of record levels of issuance seen in 2007.

Bank of America, Citibank and American Express have all raised billions of pounds in the financial markets to fund credit-card borrowing.

Based on historical trends, plastic should have begun to melt before mortgages came under pressure as consumers did everything in their power to keep a roof over their heads.

This time round, the size of America’s negative-equity problem was so large that consumers simply handed over the keys to their homes and tried to move on.

Moody’s, the credit-rating agency, is beginning to get twitchy, however. It has started to model credit-card debts against mortgage debts on a state-by-state basis, in expectation that it is only a matter of time before problems occur.

The US Federal Reserve has also been warning credit-card lenders not to push their luck.

The regulators are fearful that the economy could crack if consumers start being hit with higher fees and steep interest-rate rises. The problem may be even sharper in Britain.

“We have been trying to work out how the relationship between housing and credit cards will play out in the UK,” said one London-based credit fund that holds several billion pounds’ worth of credit-card debt.

“It seems reasonable to expect that in a great many parts of the UK the stigma of giving up your house will be much greater than in the US. People will fight harder to keep it. Logically, that would put an extra strain on credit cards.”

One former Visa executive said: “We know that a number of small businesses use a credit card as a working capital facility.

“If other lines of credit are drying up elsewhere, as they would appear to be, then that’s another area where you can assume that credit-card balances will increase. That in turn means you will see the bad debts come through.”

All Britain’s leading credit-card issuers are beginning to notice an increase in balances.

Credit-card experts are starting to find other reasons to worry. Data sent to the financial investors who own the credit-card bonds look, for the most part, to be stable. Looking beneath the average trends, however, some of the figures look less rosy.

In one of MBNA’s UK credit-card bonds, the safety buffer that protects the bondholders from suffering losses is worth little more than 4% of the total value of the bond. Bad debts from the bond are being written off at an annualised rate of 6.3%, suggesting that it is only a matter of time before the underlying holders get hit.

Capital One’s UK credit-card bond shows similar performance trends, as does the bond that backs Goldfish, the quirky credit-card business that was acquired by Barclaycard this year.

Efforts have already been made by some lenders to keep their bonds in good order. Late last year Citigroup massaged down a spike in bad debts in the bond that supports its Egg credit card by swapping £127m of problematic card debts for better-quality borrowers. The move pre-dated the bank’s decision in February suddenly to withdraw 160,000 cards from consumers it deemed “risky”.

Domenico Picone, head of structured credit research at Dresdner Kleinwort, said: “Delinquencies and charge-offs are not too worrying yet. But you only need to look at the outlook for the UK economy to see good reasons why those numbers will start to rise.”

Alastair Ryan, banks analyst at UBS, said: “Credit cards are going to become problematic quite late in this whole cycle. We’ll see the balances increase after people become unemployed and can’t pay their debts.

“If we’re going to see problems in the credit-card space, I think that will probably take until about the second half of 2009 to manifest itself.”

If experiences in the Leeds call centre are anything to go by, the problems could show up much sooner than that.

[Not Long Now]

“It seems reasonable to expect that in a great many parts of the UK the stigma of giving up your house will be much greater than in the US. People will fight harder to keep it. Logically, that would put an extra strain on credit cards.”

They forgot the BTL brigade. They WILL just default on their "investment" properties and walk away.

Why kill yourself to pay the mortgage on a property you don't live in?

[Sinking Feeling]

Up until recently, people have been able to pay off their credit cards through MEWing, now they are really going to start to find themselves in trouble. Here in Manchester, the Trafford Centre and the Lowry Centre have been more full than I've seen them in ages. This is particularly unusual given that July is usually a time people go away!

[leftalongtimeago]

Credit Crunch: Second Wave? This one reads more like a Tsunami!

[Laura]

on page 2

"The recent Bank of England credit- conditions survey revealed that banks were surprised by the level of bad debts run up on their credit cards in the second quarter of the year. Demand for credit cards also increased as banks tightened their lending criteria across the board.

Provident Financial has been inundated with requests for its Vanquis credit card, even though it charges a whopping 39.9% annual interest rate — more than double the industry average. The card is targeted at sub-prime consumers, and priced accordingly. Yet “prime” customers are washing up at Vanquis after being rejected elsewhere.

"

& we've only just begun .........

[Guest happy?]

They forgot the BTL brigade. They WILL just default on their "investment" properties and walk away.

Why kill yourself to pay the mortgage on a property you don't live in?

Because they'll come after the one you do live in to clear the debt on the one you don't.

[Doicare]

I have never needed a credit card and know very little about the terms and conditions regarding their issue and use. Are the debts on cards secured on property? If not can the card company seek to secure the debt through the courts? I have always thought that the debt on cards will be the biggest problem as pay back time arrives.

[Guest happy?]

I have never needed a credit card and know very little about the terms and conditions regarding their issue and use. Are the debts on cards secured on property? If not can the card company seek to secure the debt through the courts? I have always thought that the debt on cards will be the biggest problem as pay back time arrives.

Credit Cards are regulated by the Consumer Credit Act - originally mid-1970's but revised in 2006. Credit card agreements are unsecured, card companies can seek redress through the county court.

[since the beginning]

Credit Cards are regulated by the Consumer Credit Act - originally mid-1970's but revised in 2006. Credit card agreements are unsecured, card companies can seek redress through the county court.

They will seize your assets if you don't pay, still possible to lose your/banks house.

[Guest happy?]

They will seize your assets if you don't pay, still possible to lose your/banks house.

Possible but unlikely. A charging order could be taken-out by any creditor at any time:- whether a court would make an order for sale is a much less certain matter.

Edited July 13, 2008 by happy?

[amateursurgeon]

That's not the half of it. For a lot of Credit Cards taken out before 2006, the T&Cs/paperwork in the agreements are non-compliant with the Consumer Credit Act, and thus the debt is unenforceable. A lot of people on another forum I frequent (consumer action group) have been making hay with this and effectively getting CC debts cancelled.

Now, at the moment it is just limited to savvy individuals on one or two forums. However, a few enterprising lawyers have got wind of this and are now taking it a step further; not only are they getting the debt cancelled, they are suing the banks for all of the repayments back made under this agreement, plus interest. There are now two claims management companies in existence based around this, and there is also supporting case law. If this blows up... and it could, things will get very, very messy.

[Not Long Now]

That's not the half of it. For a lot of Credit Cards taken out before 2006, the T&Cs/paperwork in the agreements are non-compliant with the Consumer Credit Act, and thus the debt is unenforceable. A lot of people on another forum I frequent (consumer action group) have been making hay with this and effectively getting CC debts cancelled.

Link?

[uncle_monty]

That's not the half of it. For a lot of Credit Cards taken out before 2006, the T&Cs/paperwork in the agreements are non-compliant with the Consumer Credit Act, and thus the debt is unenforceable. A lot of people on another forum I frequent (consumer action group) have been making hay with this and effectively getting CC debts cancelled.

Now, at the moment it is just limited to savvy individuals on one or two forums. However, a few enterprising lawyers have got wind of this and are now taking it a step further; not only are they getting the debt cancelled, they are suing the banks for all of the repayments back made under this agreement, plus interest. There are now two claims management companies in existence based around this, and there is also supporting case law. If this blows up... and it could, things will get very, very messy.

Intriguing> Yes, a link would be much appreciated.

Thanks,

Monty

[Doicare]

Thank you for your imput regarding my question. I expect card companys to tighten busines hard in the next week or two, with card limits reduced, cards withdrawn and rates rising fast. I would welcome any comments on my opinions.

[geoffk]

its meant to be a scam= http://www.fraudguides.com/consumer_credit_card_debt.asp

[dances with sheeple]

Up until recently, people have been able to pay off their credit cards through MEWing, now they are really going to start to find themselves in trouble. Here in Manchester, the Trafford Centre and the Lowry Centre have been more full than I've seen them in ages. This is particularly unusual given that July is usually a time people go away!

As in "Dawn of the Dead" the sheeple will flock to these places even after death, it`s all they know. I think there is some kind of distressed herding behaviour going on in that the sheeple, subconsciously even, know it`s over and are talking the last deep gulps of consumerism before going under in a sea of debt. Just holding their plastic and walking through a busy mall gives them that "I`m worthy" feeling, even although I think many people have been cutting their spending for months. Under 20`s have known nothing else? It`s scary, you can feel the tension rising. People are just not ready to have the fairground lights shut off, they want to keep flouncing down the high-street pretending they are Beyonce or Beckham.

Edited July 13, 2008 by dances with sheeple

[Elizabeth]

Up until recently, people have been able to pay off their credit cards through MEWing, now they are really going to start to find themselves in trouble. Here in Manchester, the Trafford Centre and the Lowry Centre have been more full than I've seen them in ages. This is particularly unusual given that July is usually a time people go away!

Yeah and tourist towns are dead and so was a caravan park I visited recently. This is high summer? I am wondering whether august will save anyone?

[dances with sheeple]

Thank you for your imput regarding my question. I expect card companys to tighten busines hard in the next week or two, with card limits reduced, cards withdrawn and rates rising fast. I would welcome any comments on my opinions.

My credit rating must be shot to pieces, and Smile online bank have just re-issued me with a credit card and 1700 limit. All my cards were withdrawn 3-4 years ago due to running up too large a balance and just missing payments. I phoned up to say I would pay off my remaining loan to them, 1200 quid, and the guy came in like an express train telling me I was pre-approved for credit, and trying to get me to upgrade my current account etc etc. He was good because I normally shut down this type of sales patter pretty quickly. The only time he missed a beat was when I told him I am now debt free and run on cash, otherwise he was telling me how much credit they are prepared to throw my way. I was surprised that they pre-approved me for 1700 considering my past credit problems. I bit the bullet a few years ago and cleared my nearly 30k card and loans debt by paying down 500 quid a month, a painfull lesson in the folly of too much plastic, however maybe this counts for something? as I seem to be a credit magnet again.

Edited July 13, 2008 by dances with sheeple

[Elizabeth]

...I bit the bullet a few years ago and cleared my nearly 30k card and loans debt by paying down 500 quid a month, a painfull lesson in the folly of too much plastic, however maybe this counts for something? as I seem to be a credit magnet again.

Hmmm... If I was attracting attention from this calibre of suitor I would be changing my deodorant for sheep shite.

Edited July 13, 2008 by Elizabeth

[dances with sheeple]

Hmmm... If I was attracting attention from this calibre of suitor I would be changing my deodorant for sheep shite.

[Radge]

Hmmm... If I was attracting attention from this calibre of suitor I would be changing my deodorant for sheep shite.

Och hen! I just love it when you talk dirty!

[steve99]

That's not the half of it. For a lot of Credit Cards taken out before 2006, the T&Cs/paperwork in the agreements are non-compliant with the Consumer Credit Act, and thus the debt is unenforceable. A lot of people on another forum I frequent (consumer action group) have been making hay with this and effectively getting CC debts cancelled.

Now, at the moment it is just limited to savvy individuals on one or two forums. However, a few enterprising lawyers have got wind of this and are now taking it a step further; not only are they getting the debt cancelled, they are suing the banks for all of the repayments back made under this agreement, plus interest. There are now two claims management companies in existence based around this, and there is also supporting case law. If this blows up... and it could, things will get very, very messy.

And if we are lucky, then could be the end for credit cards for the masses. Make em save up like in the old days.

As in "Dawn of the Dead" the sheeple will flock to these places even after death, it`s all they know. I think there is some kind of distressed herding behaviour going on in that the sheeple, subconsciously even, know it`s over and are talking the last deep gulps of consumerism before going under in a sea of debt. Just holding their plastic and walking through a busy mall gives them that "I`m worthy" feeling, even although I think many people have been cutting their spending for months. Under 20`s have known nothing else? It`s scary, you can feel the tension rising. People are just not ready to have the fairground lights shut off, they want to keep flouncing down the high-street pretending they are Beyonce or Beckham.

''Under 20`s have known nothing else?''

I would say under 35's

[amateursurgeon]

its meant to be a scam= http://www.fraudguides.com/consumer_credit_card_debt.asp

Yes, there are many "clear your debt" scams around, and that was my first reaction. This isn't one, though I suspect many of the claims companies who could spring up around it is it's as big as I think it will be will overblow what can be done. It only applies to CCA regulated debts. That means commercial debts, mortgages, student loans, tax debts etc are not included.

The reason I know it's not a scam?

Because the people who have up until now been promoting it have nothing to gain from it - they're the same bunch who are leading court cases against the banks to recover charges, and they're running it as a self help campaign rather than a "give us your money and we'll wipe out your debts" affair.

The link to where the "action is" is here:

http://consumeractiongroup.co.uk/forum/deb...ction-industry/

Read posts referring to CCA requests or compliance.

Enjoy!

Edited July 13, 2008 by amateursurgeon

[former_optimist]

Hmmm... If I was attracting attention from this calibre of suitor I would be changing my deodorant for sheep shite.

Do you mean the coop bank is in a particularly bad state? Oh dear...

[Sour Mash]

As in "Dawn of the Dead" the sheeple will flock to these places even after death, it`s all they know.

Dawn of the Debt?