Friday, January 18, 2008

Americans In Debt, Lend Conservatively

The articles on US's bipolar relationship with debt will continue to appear at regular intervals. This is just the latest.

JPMorgan Chase & Co. and Wells Fargo & Co., two of the nation's largest banks, on Wednesday joined a growing chorus warning that the subprime mortgage mess is just the start of a sweeping lending crisis. And some fear that consumers falling behind on all kinds of loan payments could tip the economy's scale toward recession.

Strapped consumers are having a tough time making payments on credit cards, home-equity loans, and even for their cars. This has caused three of the top five U.S. commercial banks that have already reported damaging fourth-quarter results to set aside some $12.5 billion to cover future loan losses - and that number will likely grow as the year wears on.

I'll keep typing it until I'm arthritic in the fingers. The economy is slowing down and this increases default rates (just ask Prosper). Add additional margin to your loan bidding and spend the time to seek out good deals for your loans. It is better to walk away from an unprofitable loan than get caught high and dry. How much margin, you ask? Increase Prosper's default projections by about 50% and you might be in the right ballpark:

Serious delinquencies also are up sharply: Some of the nation's biggest lenders — including Advanta, GE Money Bank and HSBC — reported increases of 50 percent or more in the value of accounts that were at least 90 days delinquent when compared with the same period a year ago.

1 comment:

j9359 said...

Good advice, but instead of increasing default allowance I'd advocate tightening lending criteria instead or in addition.

What seems to be different this time (and maybe I spend too much time on housing bubble blogs) is that people are more inclined to let the house go and keep paying on credit cards. But I suspect that Prosper loans are going to be the last to get paid when things get tight.