Consumers, Well Acquainted with Mr. Frying Pan, Rush to Meet Mr. Fire

by Alex Stenback on August 23, 2007

If you have any notion that our collective national jones for borrowed money at any cost and nearly any terms will be behind us once the market, the government, et al. deals with the mortgage mess, you might want to re-think things.

For instance: You might assume, super-smart blog readers that you are (you are!), that the consumer, faced with stagnant incomes, flat-to-declining home values,
rising interest rates, and tougher credit standards, would curtail spending.  Right?  Well…not so fast.  Instead, it appears that consumers less able to tap home equity to feed spending habits are turning to credit card debt:

As Mortgage Equity Withdrawals decrease….(click for big)Mewkennedygreenspanq107

The graphic above represents MEW, or Mortgage Equity Withdrawals (cash out refinances, Home Equity Loans, etc.) [Source: Calculated Risk, Dr. James Kennedy)

Credit Card Balances are Rising...

Credit_card_debt
Source: Wall Street Journal, Credit Crunch Moves Beyond Mortgages, August 22nd, 2007
http://online.wsj.com/article/SB118773982869404682.html

Talk about frying pan to fire.  And, of course, with average credit card interest rates at already levels (13-18%) that make the ugliest sub-prime loan on the planet a bargain, Credit Card Issuers are raising rates:

Some lenders, such as USAA, are nudging up credit-score requirements across their auto loans, credit cards and personal loans. Bank of America Corp. and Capital One Financial Corp. recently raised fees and interest rates for some of their credit-card customers.

In part because of, you guessed it, rising mortgage defaults:

Nationally, credit-card delinquencies are relatively low at 4% and
haven't risen significantly in the past three years. However, in
certain markets, especially those that have been hit hard by a decline
in home values, delinquencies have spiked higher.

Might it just be that the "problem" is not mortgages, or credit cards, or [insert any other way to borrow], but the fact that for far too long undisciplined lenders have been catering to undisciplined borrowers, across the entirety of the lending universe (from hedge funds down to your neighbor.)

It’s like a trillion dollar game of chicken, and we have a hard time imagining how it ends well for many of the participants.  While we’d like to be able to say the undisciplined lenders and borrowers will get their respective comeuppance, many of the disciplined will be caught in the undertow.
Credit Crunch Moves Beyond Mortgages [WSJ]
Advance Q2 Mortgage Equity Withdrawal Estimate [CR]

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