Wednesday, September 23, 2009

Mortgage crunch’s affect on credit cards

There is this great article I read this morning talking about a Reuter’s story that describes how stressed borrowers use plastic to delay default. It seems the subprime mortgage crisis may have a domino effect. Some people who purchased houses they cannot afford have been starving off disaster with their credit cards.

More specifically, since rising mortgage payments and tighter lending standards for refinancing amid the subprime credit crisis have dried up the once easy access to home equity loans the only other fall back these middle-income borrowers have are their credit cards.

Merrill Lynch North American Economist David Rosenberg said, “When credit conditions dry up, marginal borrowers turn to plastic.” From what we have seen the past 4-5 years, with the rising housing prices in the Bay Area and California in general, many who had bought into the housing craze were marginal borrowers looking to get in the bandwagon – pretty similar to the dot com boom in the 1990s.

Scary thing about using credit cards to starve off default brought on by “rest” adjustable mortgage interest is the borrower is exchanging one skeleton in the closet for another. In other words, the borrower is merely postponing an inevitable crisis.

According to the article, U.S. Federal Reserve indicates revolving consumer credit – mainly credit and charge cards – is rising rapidly, and credit card delinquencies have reached a three year high. With the U.S. holiday season rapidly approaching, this can only get worse.

What does this mean to the percentage of us who sat in the sidelines during the housing boom not willing to jump in? The worse is yet to come – but it may come soon.

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