Credit woes: More than home loans

Mortgages aren't the only loans in line for a government bailout.

Though all eyes have been focused on faltering mortgage-backed securities, the Treasury Department last month amended its original $700 billion bailout plan to buy up a wider range of troubled assets after heavy lobbying by financial industry groups.

If the proposal passes the House on Friday, the Treasury Secretary will have the power to take depressed securities backed by credit card debt and auto loans off banks' hands.

Delinquencies are rising fast in the $2.6 trillion consumer credit market. While the sector's troubles aren't as severe as those in the $14.8 trillion mortgage arena, experts expect Americans to fall more behind in their payments as the economy continues to weaken. This will only further erode the value of securities backed by consumer credit, much as late payments and foreclosures have decimated mortgage-backed securities.

"Once you dig into it, you realize the credit crisis has spread far beyond the mortgage sector," said Martin Weiss, founder of Weiss Research "When you sum up all the debt sectors and all the potential for bad debt, you recognize that $700 billion is a drop in the bucket."

Not keeping up with credit card, car payments
Consumers are falling behind on their credit card bills. The delinquency rate jumped to 4.52% in July, up 20% from a year earlier, according to Moody's Investors Services. And banks are writing off 40% more of this debt as uncollectable as they did a year ago.

Payments on 2.38% of credit card debt were 90 days or more behind schedule, the highest level since 1991, according to the Federal Deposit Insurance Corp.

These figures are expected to rise as more people lose their jobs and file for bankruptcy, experts said. Moody's is predicting the charge-off rate, which measures uncollectable debt, to jump to 7.5%, up from 6.36% in July.

The rising delinquencies have wreaked havoc in the credit card industry and securitization market. Citigroup, for instance, said earlier this week it expects to take a $2 billion loss on securitizations in its cards division.

If they can find investors willing to buy securities backed by credit card debt, issuers are paying "significantly higher" rates, according to Moody's.

Stung by the rising delinquencies, credit card companies are clamping down on customers. They are tightening standards, reducing credit lines, increasing fees and rates and more diligently pursuing collections.

Delinquencies on auto loans, meanwhile, are projected to hit their highest rate in at least six years, according to Peter Turek, automotive vice president at TransUnion, whose records go back to 2003. He is forecasting the 60-day delinquency rate to reach 0.85% in the fourth quarter, up from 0.79% a year earlier.

As a result, lenders are pulling back on financing. This is making it harder for people to buy cars, leading to massive drops in car sales and big troubles for automakers. Not helping matters is that lenders can't turn to the securitization market for financing.

"Auto-backed securities have dried up," Turek said. "Lenders were guilty by association."

Not a repeat of the mortgage meltdown
Treasury officials said they widened the range of the troubled assets eligible for purchase to give them the flexibility of dealing with future threats to the financial system.

While it remains to be seen whether the government will actually scoop up consumer credit-backed securities, experts said the sector's problems do not pose as great a danger as mortgage delinquencies, which are blowing through previous records.

"The American financial system is not going to collapse because of bad auto loans and bad credit card debt," said Gus Faucher, director of macroeconomics at Moody's economy.com. "They are a much smaller piece of the puzzle."