Tighter . . . and tighter . . .

By Megan McArdle

Mortgage holders aren't the only borrowers getting themselves into trouble:

US consumers are defaulting on credit-card payments at a significantly higher rate than last year, raising the prospect of problems in the stricken US subprime mortgage market spreading to other types of consumer debt.

Credit-card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate – a measure of cardholders’ willingness and ability to repay their debt – fell for the first time in more than four years.

Analysts at Moody’s, the rating agency, said the trend could be related to the slowdown in the US property market and a fall in the number of borrowers rolling their mortgage debt into new and cheaper home loans.



There are multiple avenues for the spread. The credit contraction, to begin with; just as it's making it hard for strapped borrowers to refinance, it's also cutting down on those zero balance transfer deals that some people use to get themselves out of trouble, or at least stave off the bailiffs.

But of course, there's also the fact that for the last ten years, many homeowners have resolved crushing credit card debt by borrowing money on the value of their homes. That's suddenly gotten much harder to do, which may be forcing people into default.

And, obviously, people who are having trouble meeting their mortgage payments may decide that Visa and Mastercard need to get in line behind the bank with the power to kick them out of their house.

No one knows which of those things is dominant, however; or even how deeply the two phenomena are related. As the article says:

But it is not clear that the borrowers defaulting on their credit cards are the same people defaulting on their subprime mortgages, it added. This is in part because underwriting standards in the credit-card sector have been more robust than in the mortgage industry. Also, many highly leveraged subprime borrowers, with little or no equity in their homes, may choose to default on a mortgage before risking being unable to charge everyday necessities to their credit card.



This doesn't seem like a good strategy; the conventional wisdom is hold onto the house! On the other hand, the conventional wisdom that said "Buy a house ASAP!" doesn't seem to be working out so well for subprime borrowers, so perhaps it's time to give the CW a rethink.

This article available online at:

http://www.theatlantic.com/business/archive/2007/08/tighter-and-tighter/1807/