| Bad Credit Impact Widens |
| By Credit Federal |
Published
11/7/2007
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Financial News
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Bad Credit Affects Even Good Credit People
Problems in the subprime (bad credit) mortgage market is spreading to credit card and auto loans.
Many major banks and credit card companies have started acknowledging a shift in consumer behavior, including more people unable to pay off their debts. Capital One Financial Corp. increased its estimates for next year's projected credit losses to over $5 billion partly because of more payment delinquencies by its credit card holders. And now that the holiday season is upon us, the credit crisis could grow worse quickly.
The collapse in housing prices and the upheaval in the mortgage market was initially sparked by bad credit people; often referred to as subprime borrowers, who increasingly defaulted on their home loans.
Another contributor to the mortgage problem was people using their home equity as a cash resource. Many used the loans to pay off other debts but mainly to go on spending sprees which increased their debts.
A Morgan Stanley analyst warns that the subprime mortgage implosion is affecting other areas, given that banks have tightened their lending to consumers and expects even more stringent lending standards. This harms consumers right when unemployment rates are rising and housing values are falling.
In recent weeks, many banks and card issuers have increased 'loan loss' reserves. Under accounting rules, they are required to estimate the amount of loans that won't be collected. Should that amount increase, they must set aside more money to cover those loans. Higher loan loss reserves equal lower earnings.
Loans for credit cards, auto financing and other debt are often sliced up and sold as securities on global debt markets. Mortgages are securitized that way, too. And as has been evident in recent months, surging defaults in mortgage portfolios have knocked down the value of those assets, creating a ripple effect as securities have had to be repriced at much lower values.
These new consumer worries could just spell more trouble for financial companies. Financial stocks have accounted for 342 points to the downside in the Dow Jones industrial average this year, and are the only sector dragging down the index. Without them, the Dow would be 2.5 percent higher than it is now.
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