Bad Consumer Loans Begin to Level

February 19, 2010

It has been a long recession and it is not over yet despite signs of economic recovery. Consumers have been dealing with an incalcitrant banking industry that has been busy foreclosing on homes and cancelling credit cards. In 2009 the mountain of debt and troubled loans seemed too high to climb, but apparently the peak may have finally been reached.

Bad loans or loans in default seem to be leveling off which is good news for banks and consumers. Big banks like Wells Fargo and Bank of America can almost be heard breathing a collective sigh of relief as the rate of loan defaults slows down.

This is a situation though that has two facets. It is good that consumer loan defaults are slowing, but one of the reasons it is happening is because the credit markets are so tight that fewer loans are even being made. The flood of loan defaults last year including millions who had taken out loans they could not afford in the first place. Lenders pulled back credit availability last year which lowered the based used for default calculations.

In other words, people who could not afford loans and people who could were both punished by the credit crunch. Underwriting standards have been tightened making it more difficult to get a loan or a credit card. Now there are signs the bleeding is being staunched and the loan markets are stabilizing. It’s been a long time coming.

But the danger of rising loan default rates continuing is far from gone. Unemployment remains high and millions are expected to face foreclosure this year despite government loan modification programs. Consumer loan losses should peak in 2010, but will they? The answer to that question depends on how the economy does over the remaining eleven months in 2010.

Millions of people have either lost their jobs or are working fewer hours or for less pay. The slow recovery is hurting consumers’ ability to repay debts. Lending write-offs last year were staggering. There was $33.7 billion in loan write-offs and $6.5 billion in credit card defaults recorded in 2009.

The loan default business is big business any way you look at it.

It probably doesn’t hurt too many feelings that large lenders like Bank of America lost $2.2 billion overall in 2009, or that credit card companies wrote off a much as 10 percent of their portfolios due to bad debt in that same year. But the reality is that consumers should not wish losses onto banks because much of the loss comes on the backs of consumers.

A stronger economy is the only way consumer loan default rates will return to normal. Economists are hesitantly saying the U.S. will expand but at a slow pace during 2010. Consumers facing foreclosure but who still have full employment can take hope from the fact the government is making it easier for them to access the government backed home loan modification programs. And in the opinion of many debt counselors, the cancelling of many of the consumer credit cards is not a negative act.

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