No Mortgage, No HELOC, Next No Credit Cards

During the bubble it seemed like anyone could get any kind of mortgage. But the bubble burst and the exotic mortgages disappeared. Then lenders started shutting down or reducing HELOCs. Now comes a report that lenders will have to start trimming some of our credit card debt. The never ending limits of $40,000 to over $100,000 of credit card debt is not sustainable. What?

It does not matter that large credit card debt was never sustainable for the customers, this Fortune CNN Money report illustrates how it is not sustainable for the lenders. So changes will be made. Credit cards shall be cut and/or limited. The article titled The Next Credit Crunch illustrates how the problems are emerging in the credit card industries. Lets take a look -

That conclusion comes from the latest data on credit card debt. It's growing fast, but the problem is bigger than that - and to understand what it means, we have to take a few steps back.

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That's where the credit card reports come in. Last year, just as the subprime crisis happened, credit card debt took off. The home-equity ATM had been shut down, so people turned to the last source of easy money they had left, the most expensive debt on the menu, credit card borrowing.

Since credit card debt has been growing much faster than the economy - more than 8% in last year's third and fourth quarters and over 7% in May (the most recent month reported)- people are apparently using it as a substitute for income. Thus, for the past year or so we have still maintained the standard-of-living illusion.

But a big crunch is coming - and here's why. Credit card debt, like mortgage debt, gets bundled, securitized, and sold off by banks. Citigroup (C, Fortune 500), one of America's largest credit card lenders, just reported that it lost $176 million in the second quarter through securitizing such debt. That happens when the buyers of those securities observe rising delinquency rates and rising interest rates, and decide the debt is worth less than Citi thought. More generally, the amount of credit card debt that is securitized nationwide has plunged by more than half in the past five months because it's getting riskier. That means credit card issuers will be charging customers higher interest rates, and since the banks can't offload as much of the debt as before, they'll have less money to lend to cardholders.

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It may be that the standard-of-living bubble finally has to deflate. Sustainable increases in living standards have to be earned, not borrowed, and that means performing ever higher value work that can't be outsourced. We haven't been meeting that challenge very well; doing so will probably require much more and better education for millions of Americans, which takes time and money.

There may be some problems with the credit lines closing - many of them are already filled up. Unlike equity lines where people may be planning big projects or big pay-offs of other debt, credit cards are use for day to day transactions that can fill up a credit card fast. During the bubble it became very common for people to pay off their credit cards with their home equity, then run the charges right back up again. Now with HELOC lock-downs many people are just getting another credit card to max out. These changes will have to be internalized.

It sounds as this is not an if, rather a when. It probably is already happening but lenders are using other excuses - like a missed payment somewhere else. But when it starts happening to large swaths of the upper-middle-class we will probably see article after article of upset consumers.