Credit Card Debt Securitization

Subprime mortgages were converted to mortgage securitization.  Anyone who has followed the issue knows that much.  (Here's a primer if you need one.)  Here is something few have mentioned: Other debt was securitized, too.

People would tap into their homes for equity.  People would use the equity to pay off credit card debts.

With the real estate market down, people no longer have equity to tap into.  So what's going to happen to credit card balances?  They aren't going to get paid, of course.

Which means banks will be facing additional problems very soon. 

United States Consumers have almost one trillion in credit card debt ($962 billion was the latest number; data).  And 2.57 trillion in total consumer debt.

What will happen when consumers stop paying their debts?

That the government and most of the so-called "experts" aren't even addressing this issue yet just proves that trusting those in authority is foolish.  The experts can't think globally, and they can't think more than one move ahead.

We are in for a world of hurt.

Comments

[KipEsquire]

A major part of the subprime CDO debacle was the role of the rating agencies, which clearly overstated the creditworthiness of subprime-backed securities.

I'm not sure that's happening with securities backed by credit card receivables. In fact, I'm pretty sure it's not happening.

There's nothing wrong with bunding and selling risky debt. The problem is bundling and selling risky debt and pretending it's not risky.

[Mahan Atma]

The other big difference is that in most states, mortgages are non-recourse loans. If you default on your mortgage, the only thing the lender can do is take back the house (which is worth less than the outstanding loan).

While credit card debt is unsecured, the lender can -- and will -- come after you for it. The only way you can discharge the debt is by going into bankruptcy, and even that is much harder now under the new laws.

This is why there are people who are paying their credit card bills, but not their mortgages.

Also, the credit card companies can make up for their losses by raising the rates and fees on existing debt holders in various ways. Mortgage lenders can't do that.

[Mike]

Good points, guys. Thanks.

I wonder, though, if banks would even go after people walking away from their homes? Would the people defaulting even have assets?

Nevada is a big bubble state, and it doesn't have an Anti-deficiency Law, while California does. I don't know the law for Florida.

In Nevada, a lot of people are still walking away from their properties. They just don't have a choice. According to this story, NV has the highest foreclosure rate in the country:
http://www.kvbc.com/Global/story.asp?S=9343149

[Scott]

Thanks for the heads up.. ill make sure i don't tap into my equity.

[keith]

Honestly I don't think we can blame the banks, I mean it's our bad habits of purchasing on CC that brought us to this level.