Credit woes: More than home loans

$700 billion bailout will let Treasury buy securities backed by credit cards and car loans. Delinquencies rising.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Tami Luhby, CNNMoney.com senior writer

Should the House go along with the Senate version of the $700 billion bailout proposal?
  • Yes
  • No
Photos
The crisis: A timeline The crisis: A timeline The crisis: A timeline
A shocking series of events that forever changed the financial markets.

NEW YORK (CNNMoney.com) -- Mortgages aren't the only loans in line for a government bailout.

Though all eyes have been focused on faltering mortgage-backed securities, the Treasury Department last month amended its original $700 billion bailout plan to buy up a wider range of troubled assets after heavy lobbying by financial industry groups.

Now that the proposal passed the House and was signed into law on Friday, the Treasury Secretary will have the power to take depressed securities backed by credit card debt and auto loans off banks' hands.

Delinquencies are rising fast in the $2.6 trillion consumer credit market. While the sector's troubles aren't as severe as those in the $14.8 trillion mortgage arena, experts expect Americans to fall more behind in their payments as the economy continues to weaken. This will only further erode the value of securities backed by consumer credit, much as late payments and foreclosures have decimated mortgage-backed securities.

"Once you dig into it, you realize the credit crisis has spread far beyond the mortgage sector," said Martin Weiss, founder of Weiss Research "When you sum up all the debt sectors and all the potential for bad debt, you recognize that $700 billion is a drop in the bucket."

Not keeping up with credit card, car payments

Consumers are falling behind on their credit card bills. The delinquency rate jumped to 4.52% in July, up 20% from a year earlier, according to Moody's Investors Services. And banks are writing off 40% more of this debt as uncollectable as they did a year ago.

Payments on 2.38% of credit card debt were 90 days or more behind schedule, the highest level since 1991, according to the Federal Deposit Insurance Corp.

These figures are expected to rise as more people lose their jobs and file for bankruptcy, experts said. Moody's is predicting the charge-off rate, which measures uncollectable debt, to jump to 7.5%, up from 6.36% in July.

The rising delinquencies have wreaked havoc in the credit card industry and securitization market. Citigroup, for instance, said earlier this week it expects to take a $2 billion loss on securitizations in its cards division.

If they can find investors willing to buy securities backed by credit card debt, issuers are paying "significantly higher" rates, according to Moody's.

Stung by the rising delinquencies, credit card companies are clamping down on customers. They are tightening standards, reducing credit lines, increasing fees and rates and more diligently pursuing collections.

Delinquencies on auto loans, meanwhile, are projected to hit their highest rate in at least six years, according to Peter Turek, automotive vice president at TransUnion, whose records go back to 2003. He is forecasting the 60-day delinquency rate to reach 0.85% in the fourth quarter, up from 0.79% a year earlier.

As a result, lenders are pulling back on financing. This is making it harder for people to buy cars, leading to massive drops in car sales and big troubles for automakers. Not helping matters is that lenders can't turn to the securitization market for financing.

"Auto-backed securities have dried up," Turek said. "Lenders were guilty by association."

Not a repeat of the mortgage meltdown

Treasury officials said they widened the range of the troubled assets eligible for purchase to give them the flexibility of dealing with future threats to the financial system.

While it remains to be seen whether the government will actually scoop up consumer credit-backed securities, experts said the sector's problems do not pose as great a danger as mortgage delinquencies, which are blowing through previous records.

"The American financial system is not going to collapse because of bad auto loans and bad credit card debt," said Gus Faucher, director of macroeconomics at Moody's economy.com. "They are a much smaller piece of the puzzle." To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Sponsors

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.