Credit Cards (and Boat Repossessions) Signal Continuing Consumer Stress

Perhaps I suffer from knowing a bit too much about the financial services industry in general and credit cards in particular due to my consulting work, but I’m amazed at the eagerness of investors to go bottom fishing there. Granted, card players like Discover weren’t making subprime loans, but with prospects for the economy at best mixed, consumer debt increasing in the face of weakening employment conditions, and the home equity loan piggy bank being restricted, credit cards look to be the nexus of some pretty pronounced stresses.

And even if you wanted to place a few bets on the economic recovery coming early, financials would not be the best place to go hunting. The cliche (but these homilies have a following for good reason) is that each bull market brings a new leadership group to the fore.

Credit ops officers have told me that American Express, admittedly more conservative about risk than other issuers, cut quite a few credit lines earlier this year. That alone says that they have a less than rosy view of the landscape.

Not surprisingly, the Wall Street Journal finds negative indicators on the credit card front:

A growing feeling that stand-alone credit-card lenders will weather the economic slowdown has started to lift shares in firms like American Express Co., Discover Financial Services and Capital One Financial Corp.Credit-card bulls — believing that a recession may be avoided — think charge-offs won’t go to recession highs….But two key data points indicate defaults climbing higher, not falling fast.

First, card borrowers are starting to pay back less of their outstanding balances each month…Oppenheimer calculates that, for the companies it covers, borrowers paid back 19% of their balance on average in April, down from 19.7% in the year-earlier period. American Express’s borrowers paid down 23.8% of their balances in April, down from 25% a year ago, according to Oppenheimer. Conversely, Capital One borrowers paid down 18.5% of their balances last month, up from 17.6% a year earlier.

Also worrisome are data from Moody’s suggesting that borrowers are finding it harder to become current on credit-card loans once they fall behind. The ratings firm notes that the amount of loans on which borrowers have skipped three or more payments has started to rise more quickly than loans that have missed one or two. Once borrowers are three payments behind, fewer of them ever catch up.

Federal Reserve data say revolving credit outstanding — which tracks credit-card balances — increased 6.7% in the first quarter, compared with the year-earlier period.

And while overlevered consumers are stereotyped as low-middle income (not entirely accurate, since credit cards are also a major source of funding for small businesses), there are signs of stress among the affluent as boat repossessions rise. From the New York Times:

When a boat owner defaults on his loan, the bank hires Jeff Henderson to seize its property…. Mr. Henderson has never been busier.

“I used to take the weak ones,” he said. “Now I’m taking the whole herd.”

Boating was traditionally the pastime of the well-off, but the long housing boom and its gusher of easy credit changed that. People refinanced their homes and used the cash for down payments on a cruiser, miniyacht or sailboat. From 2000 to 2006, retail sales for the recreational boating industry rose by more than 40 percent, to $39.5 billion, while the average loan amount more than tripled to $141,000.

Last year, as real estate faltered, the gears went into reverse. The number of boats sold fell 8 percent. Many boats are fuel hogs, and rising gasoline and diesel prices meant a weekend jaunt could cost hundreds or even thousands of dollars. Owners found they could not sell a boat for what they owed and could not refinance either…

Mr. Henderson, 48, is repossessing nearly a boat a day, most from the Great Lakes area …

Boat loans, like car loans, give the bank permission to recover its collateral in the case of default, which explains why a repo man can go into a yard without technically trespassing. Nevertheless, the custom is to get in and get out before the owners, neighbors or authorities notice anything amiss.

If the boat is in a marina, the pace is somewhat more leisurely. People delinquent on their boat loans also tend to be behind with their dock payments; since Mr. Henderson pays any overdue charges, most marinas are delighted to help him….

Some people lose their house or their boat to abrupt setbacks: illness, job loss, divorce. Mr. Dahmen [former owner of boat Toy Box], who works as a technology manager for a car manufacturer, belongs to a second, probably larger group: he simply spent beyond his means. He is one of the millions of reasons the consumer-powered American economy did so well for most of this decade, and one of the reasons its prospects look so bleak now.

“There’s a certain sense of failure about all this, to tell you the truth,” Mr. Dahmen said. “There really is.”

He originally bought a smaller, more affordable boat, but a salesman talked him into an upgrade. “Oh yeah, I said, that would be cool.” And it was: There were many pleasant cruises during the brief Michigan summers.

The merriment came at a price, though. Toy Box cost $175,000. With the trade-in and a down payment, Mr. Dahmen ended up with a $125,000 loan. “You pay the interest up front,” he observed, “and the principal never goes down.” After seven years he still owed $111,000, about twice what the boat is worth. Meanwhile, he lost his condominium when his mortgage readjusted and those payments went up. His 401(k) is down to $9,000.

“I oversaturated myself with long-term debt,” he said. “It was a risk, a calculated risk. I obviously lost.” He is declaring bankruptcy…..

From now on, Mr. Dahmen said, the consumer economy would have to get by without him. “I have no intention of ever buying anything, ever,” he said. “I don’t think I could if I wanted to.”

Mr. Dahmen gave Toy Box a hug. “O.K., I’m gonna go cry now,” he said. He drove away without looking back. Mr. Henderson left, too. His house is about 15 miles away, inland. He used to live on the water, but it reminded him too much of work.