Credit card defaults are rising

Loan Type	Charge-off Ratio	Rising since (quarter)	Highest since (quarter)
Credit Cards	5.47	2007 II.	2003 IV.
Residential RE	1.13	2006 II.	All Time
Commercial RE.	0.93	2006 II.	1994 1.
All Loans- Leases	1.24	2006 I.	1992 III.

 

The source of the seasonally adjusted data is the Federal Reserve. All time is since the beginning of Fed’s records.

 

According to Steven Roach, who has a reputation for pessimism and has been warning about a downturn for years now, we’ve completed about 65 % of the credit crisis phase of this downturn. It’s important to note that the credit crisis has mostly been a phenomenon in the developed world. In China, Brazil the problem so far has been excessive credit expansion, not tightening. As we complete the credit crisis phase, the global, real economy phase is only beginning.

 

It’s important to note about the table above that there’s a lag of one or two years between the peaks in total loan and lease defaults, and in credit card loan defaults. It takes about one to two years after the peak of total loans default ratio before a peak in consumer defaults is seen. This is important because it shows us that even in the very unlikely case that we have seen the peak in the total loan-lease default ratio in the US, banks will have far more writedowns on their consumer loan portfolios.

 

It should also be noted that all of the categories above have been rising continuously, with no sign of any easing.

 

Meanwhile, according to a conference call by Jamie Dimon, the head of JP Morgan in July of this year, prime mortgages look “terrible”. They have so far been performing better than subprinme loans,  but there are increasing signs that the contagion is spreading to the prime mortgage portfolio of banks.

 

Here’s a chart of JP Morgan’s prime mortgage delinquency ratio: 

JPM prime defaults

  30-day delinquency trending among JP Morgan’s prime mortgage portfolio. (Source: investor presentation)

 

This graphic is showing the deterioration in the prime portfolio in a way that requires no further explanation. Between April 2007 and Jun 2008 the default rate has quadrupled.

 

And finally, to show why the finance sector needs higher interest rates, not lower, here’s an ad I came across yesterday:

 

It’s clear that both the consumer and the business sector have a lot more to learn…