| Bad Credit Lenders Facing High Risk |
| By Credit Federal |
Published
10/22/2007
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Unsecured Loan
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Bad Credit Loans Mean High Risk for Lenders
The new high risk to the economy which is weighing heavily on the markets is the default of bad credit loans. US banks have raised reserves for loan losses by at least $6 billion over the second quarter and by even larger amounts from last year, indicating financial executives believe consumers will be increasingly unable to make payments on a variety of loans. Banks are not just adding to reserves for mortgage loan defaults, but also on home equity loans, auto loans and even credit cards.
According to Michael Mayo, Deutsche Bank analyst, "What started out merely as a subprime problem has expanded more broadly in the mortgage space and problems are getting worse at a faster pace than many had expected. On top of this, there is an uptick in auto loan problems, which may or may not be seasonal, and there is more body language from the banks that the state of the consumer was somewhat less strong [than thought]."
Dick Bove, analyst at Punk Ziegel, said bank earnings indicated there are problems with consumer debt that extend beyond the well known issues in the real estate markets. Auto loans are clearly a new area of concern.
In addition to subprime problems, the U.S. debt market is facing yet another challenge. The shaky U.S. credit markets will face a critical test over the next few weeks, as companies try to find buyers for hundreds of billions of dollars in short term debt that is set to expire. Corporate borrowers are expected to struggle in refinancing their debts, and the repercussions may go far beyond the companies in question. As they pay higher interest rates or turn to expensive alternatives to short term debt, the higher costs are likely to be passed on to consumers and businesses throughout the economy, potentially pushing up the costs of everything from credit card debt to car loans and mortgage loans.
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