Here's a crude summary of the banking industry: Borrow money short-term, lend it out long-term, then pocket the difference minus whatever people can't pay back. (I know, it's crude. I warned you.)
During happy economic times, that last part isn't a serious problem. Throughout the housing boom, homeowners could either refinance their homes, or sell them for a small fortune more than they were purchased for. Lenders lent, purchasers paid back, and everyone was happy.
As it becomes clearer that loose lending practices have saddled consumers with loans they could never afford from day one, delinquencies are on the rise ... but just how bad is it getting?
The Federal Reserve recently released some numbers. Let's take a look:
|
Year
|
Residential Loan Delinquencies
|
Total Consumer Loan Delinquencies
|
Credit Card Delinquencies
|
|
2002
|
2.12%
|
3.51%
|
4.87%
|
|
2003
|
1.83%
|
3.28%
|
4.47%
|
|
2004
|
1.56%
|
3.08%
|
4.11%
|
|
2005
|
1.55%
|
2.82%
|
3.70%
|
|
2006
|
1.73%
|
2.90%
|
4.02%
|
|
2007
|
2.53%
|
3.13%
|
4.25%
|
|
Q2 2008
|
4.33%
|
3.57%
|
4.90%
|
Eyes glazing over? I don’t blame you, so let's try to interpret some of this mess. The first important point is that residential loan delinquencies aren't just huge, they're historically huge. In fact, the current 4.33% is the highest reading since the Fed started supplying this data in 1991. For investors in companies like Washington Mutual (NYSE: WM), Wachovia (NYSE: WB), and Beazer Homes (NYSE: BZH) waiting for a normal cycle to bring things under control, realize that what we're facing right now is anything but normal.
Another notable point comes from credit card delinquencies. While the uptick isn't nearly as impressive as that of residential loans, delinquencies nearing 5% is still a pretty serious number. In fact, the last years in which credit card delinquencies matched current levels happened to be around 1991 and 2001 -- in the smoke of the last two recessions. None of this bodes well for big credit card pushers like American Express (NYSE: AXP), Capital One (NYSE: COF), and Discover Financial (NYSE: DFS), which rely on not only transaction volume but also customers' ability to repay their bills every month.
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