naked capitalism

Given how overextended consumers are, and how banks have been cutting back on the cheapest piggybank, home equity loans, by slashing those credit lines, and the reports of rising delinquencies from even conservative lenders like American Express, one would think we’d also be hearing more about serious increased in credit card losses.

But under the new bankruptcy code, if you do no qualify for Chapter 7 bankruptcy (crudely, if you are above the average income in your state), it is easier to walk from your mortgage than your credit card debt. So credit card issuers may be showing lower losses than they otherwise might because other lenders are taking the hit,

That may be about to change. From MarketWatch:

Credit-card debt is on the brink of imploding and will be the next storm to hit the fragile finance industry, an investment research firm predicted this week.

According to Innovest StrategicValue Advisors, banks will charge off $18.6 billion in delinquent credit-card accounts in the first quarter of 2009 and $96 billion in all of 2009, more than double the research firm’s forecast for all of this year.

Innovest projects that amount would be high enough to damage some of the biggest card issuers.

Credit-card charge-offs are “defying gravity” when compared with the problems in the mortgage market, according to Gregory Larkin, senior banking analyst for Innovest. But that will change as they catch up with mortgage charge-offs, which have spiked eightfold since the third quarter of 2007.

“If history is any indicator, there should be an equivalent surge of credit-card charge-offs very soon,” he said, though he concedes that an eightfold increase would be very aggressive.

Comparatively, charge-offs reached $4.2 billion in the first quarter of this year and $3.2 billion in the same period a year before, according to the Federal Reserve, which only reports non-securitized debt. Innovest’s projections include all credit-card debt, which the firm believes is double what the Federal Reserve reports. For all of 2007, charge-offs tallied $26.6 billion, according to Innovest’s calculations, and the firm estimates they will reach $41.5 billion at the end of this year.

The jump in credit-card charge-offs is linked in part to the credit crisis now in play. As banks have tightened lending standards, they have mostly done away with the once-popular roll-over options — usually at 0% introductory rates — that allowed borrowers with delinquent accounts to get new cards elsewhere. Larkin believes all that bad credit is going to surface quickly and could have a similar impact as the mortgage crisis has had on banking.

But credit-industry analysts shake those prognostications off, noting that the number of dollars involved in credit cards loans versus mortgages is substantially lower.

“Defaults on $2,000 or $5,000 in credit-card debt are entirely different than someone defaulting on a $500,000 mortgage,” said Greg McBride, senior financial analyst for Bankrate.com.

“I’m skeptical that the magnitude of credit quality is going to be as severe as some say,” he added.

The average credit-card debt is $2,200, according to the Federal Reserve. On a revolving basis, there was roughly $970 billion owed on credit cards at the end of July. However, because many people use credit cards for the rewards programs and pay off their debt each month, it’s unclear how much of that total is actually outstanding.

What’s more, as delinquencies rise — and they will because of the weakness of the economy — credit-card issuers will take steps to stem the tide. That will include cutting credit off from problem borrowers and tightening restrictions on new cards.