Credit-Card Debt May Be Next Problem
ROBERT SIEGEL, host:
The collapse of the housing market caused real problems for companies dealing in securitized mortgage investments. And now rising unemployment and tighter household budgets may spell trouble for those dealing in other securitized debts. That includes the auto loans, student loans, and credit cards that Chris Arnold just mentioned.
MELISSA BLOCK, host:
We're going to focus here on that last chunk of consumer debt and how it's been packaged and sold to investors. Business reporter Kathy Chu of USA Today has been writing about this. And Kathy, how much money are we talking about that's wrapped up in U.S. credit card debt right now?
Ms. KATHY CHU (Business Reporter, USA Today): Almost a trillion dollars of credit card debt is out there right now. And as more consumers keep spending on their credit cards, that amount will rise as well.
BLOCK: OK. And of that amount, how much is securitized in the way we're describing it here?
Ms. CHU: Roughly half of it - or more than 450 billion of this debt is securitized.
BLOCK: What is the result of this securitization of credit card debt? I mean are companies now making riskier loans because banks are protected this way?
Ms. CHU: Just like with mortgages, because banks have sold off the credit card debt, they've shifted some of the risk off their books. And critics say that it's allowed banks to go out and make too many loans to too many people. And the result is what we have today - more people defaulting on their credit cards and delinquencies rising as well.
BLOCK: If you look at the model from what happened with the home mortgage market, when people started to default at rates that were higher than expected, everything came tumbling down. If you look at credit card debt, are we looking at a similar flawed assumption and maybe a similar crisis that will follow?
Ms. CHU: That's a concern, Melissa, that more consumers will be defaulting on credit card debt, partly because banks have raised rates and fees to such high levels. Nowadays, if you miss one payment, you go one dollar over the credit limit, you could get your rate raised to 32 percent. And the concern is that these high rates could push people over the financial edge.
BLOCK: And is that why we're starting to see more and more defaults?
Ms. CHU: We're seeing more and more defaults, more and more delinquencies. Defaults are - have been rising for two years. Delinquencies are at a six-year high. And some economists believe that they are going to hit record levels - so the highest ever, even higher than past recessions.
BLOCK: You know, again if you look at the home mortgage model, if a bank forecloses on a home, they can recoup some of the lost value. Maybe not the whole thing, but, I mean, there's a tangible asset there. But if you look at a credit card bill that's not being paid, you can't go back and get the dinner back that was bought or the plane ticket that was bought. What's the effect? Who ends up bearing the burden of those losses?
Ms. CHU: The burden of the losses will go to investors. Banks do bear some of the losses on debt that has been securitized - credit card debt, I should say, that has been securitized. But investors are going to bear the losses as well. So as, you know, all these events kind of culminate in this crisis, the fear is that this could aggravate and accelerate the economic downturn.
BLOCK: Could it be worse than what we're seeing with the current mortgage crisis?
Ms. CHU: The credit card market is just a fraction of the mortgage market, so the effect is not going to be as big. However, if more and more consumers start defaulting on their credit card obligations, what will happen is it will make it harder for banks to absorb other financial shocks. And as we know, there are many financial shocks going on in the system today.
BLOCK: And what are some of the fixes, potential fixes, that are being talked about?
Ms. CHU: Regulators have been mulling credit card reform, rate and fee reform, for quite some time now. The concern by consumer groups is that these reforms will not come to pass because regulators will be worried that banks - this will further deteriorate banks' financial conditions. So there's an argument both ways. Consumer advocates say that at a time when more consumers are struggling to pay their bills, you need this reform more now than ever, not less. Banks disagree. They say they do not want anything that will deteriorate their financial conditions.
BLOCK: OK, Kathy Chu, business reporter with USA Today. Thank you very much, Kathy.
Ms. CHU: Thanks, Melissa.
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