Sunday, 10 February 2008

The news just keeps getting worse. We are now told that we are nowhere close to the end of the writedowns by banks all over the world. Goldman Sachs now estimates that the total loss in the mortgage security world will total $400 billion (this includes more than just subprime mortgages), up from an estimated $200 billion only a few quarters ago. And that is if home prices only fall about 20% on average.
And that probably assumes normal default patterns. The Wall Street Journal noted today that Fitch has warned of an additional $139 billion in mortgage-related losses from individuals who are simply walking away from mortgages where the homes have lost value. They are doing this in advance of foreclosure proceedings. Fitch expects that losses will be 26% of the value on subprime loans made in 2007.
But returning to the rise in spreads, this also means that subprime credit cards, subprime auto loans, and subprime student loans will start costing a lot more, or become less available. There are tens of millions of subprime credit cards. And their cost is going to go up. But here I refer not to the borrower but to the lender.
Defaults on credit cards are rising. 7.6% of all credit cards loans were 60 days past due in December. Credit card debt is sold to various investors as bundled securities, just as mortgages were. If delinquencies rise, then the rates that investors want must rise to cover the defaults. Interest rates are going to rise on all but the highest-rated credit card debt.



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