In 2007 our economy began suffering from massive foreclosures of homes. Caused by sub-prime borrowers being approved by lenders by the millions; once they defaulted on their mortgage note, the dominos began to fall. Fallout was felt around the world by banks and governments that purchased large mortgage backed securities that quickly became worthless. Consumers and investors quickly lost confidence in the institutions that participated in these high risk securities. Investment banks on Wall Street failed, Fannie Mae and Freddie Mac, the two quasi-government banks that were at the epicenter of the crisis failed. Now two years later, foreclosures are still occurring at an accelerating rate, now caused by 25 year high unemployment levels.
During 2009 we will likely see an all time high of personal and business bankruptcies in the U.S. Across the U.S. in February 2009, personal bankruptcies rose 26% over 2008, which was a higher than average year itself.
Banks that are on the cusp of being broken up include Citibank and Bank of America, two banks that were highly exposed to losses suffered in the sub-prime mortgage meltdown. They are also banks that have made massive numbers of consumer and small business credit card loans.
According to a CNN Money article dated today, March 10, $76 billion in credit card debt was originated in 2008. $46 billion was originated by Bank of America, J.P. Morgan Chase, and Citigroup. Clearly one of the next big bank messes to evolve is massive amounts of credit card default. Credit card default rates for 2009 could surpass 10.0%. Total credit card debt for
The situation could end up being worse if a bankruptcy law currently being debated in congress is passed. The law would allow bankruptcy judges to force home mortgage lenders to accept a lower interest rate on their loans. If this law passes, the number of personal bankruptcies will dramatically rise so homeowners can get a chance at a lower mortgage payment. With personal bankruptcy, nearly all personal credit card debt gets wiped out.
As if banks and the economy didn’t have enough to worry about, now we can add potentially billions of dollars of credit card losses to their list of problems.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
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