The subprime mortgage crisis in the US,
which has already hit the global credit markets, could be spreading
into other consumer credit sectors, according to data from global
credit ratings agency Moody’s. US consumers are beginning to
default on credit card payments at a significantly higher rate than
in the year-ago period, and credit card companies were forced to
write off 4.58 percent of payments as uncollectable in the first
half of 2007, a rise of almost 30 percent from last year.

Moody’s says that investors in many credit markets around the
world are being hit by their exposure to securities backed by
“loosely underwritten loans to high-risk borrowers”. The
securitisation of many types of assets, including credit card
asset-backed securities, could be affected as investors in these
instruments adjust and evaluate their risk exposure.

“Like mortgages, many of these consumer credit products were
directly securitised and sold to investors all over the globe,”
Moody’s said in a research note. “Their importance within the
asset-backed security market is considerable. Securities worth more
than $350 billion were issued in 2005, collateralised by credit
cards, auto, student and other consumer loans. In the same year,
just over $500 billion in securities issued were backed by home
equity loans.”

Difficult to restructure debt commitments

But the housing market slump in the US and the ensuing subprime
mortgage mess has made it far more difficult for US consumers to
restructure their debt commitments, as lenders tighten up lending
criteria and as home values shrink, making it harder for consumers
to withdraw home equity to pay off their other debts, such as
credit card bills.

Moody’s says that many US households that have large debt
obligations related to credit cards or auto loans face “challenging
times” in the near future. “As mortgage credit quality continues to
erode, we expect other consumer credit products to face increasing
difficulty as well. The financial distress that households are
currently facing will make it even harder for consumers to keep up
with their monthly debt payments,” it said.

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According to a separate report in the Financial Times
newspaper, Moody’s said that the combination of higher interest
rates and a softer real estate market is diminishing the
attractiveness of mortgage refinancings. At the same time, Moody’s
said, the people defaulting on credit cards may not be the same
people defaulting on their subprime home loans, and added that
borrowers with little or no equity in their homes may choose to
default on their residence before giving up their credit cards.

US revolving credit


Fees and rates on the rise

Card issuers in the US have begun increasing transfer fees and
introductory APRs, and are also reducing credit limits. Bank of
America, JPMorgan Chase, HSBC and Capital One recently raised fees
and interest rates for some credit card customers, and other
lenders are becoming more wary about extending credit. Also,
average credit card approval rates have fallen and direct mail
offers to new customers are on the slide.

Separate data from, a US card industry metrics
tracker, shows the amount of credit card debt that consumers are
paying off has fallen. The portion of outstanding balances paid in
July fell to 18.3 percent from 18.4 percent in June. This is due to
consumers having to rely on their credit cards more, having found
it more difficult to secure other forms of borrowing. Figures from
the US Federal Reserve for July show that consumer credit rose at
an annual rate of 6.5 percent to a record $2.45 trillion, with
revolving credit increasing by 8.4 percent.

Moody’s is predicting delinquency rates for credit cards and
auto loans will go back to levels similar to those observed at the
beginning of the decade, during the 2001 US recession. “The
distress caused by the subprime meltdown might be replicated
through new channels,” the agency said in its research note.