Could We Be Headed for Another 2008

Could We Be Headed for Another 2008

Could We Be Headed For Another 2008?

Charles Keenan

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people's living rooms thanks to the relaxation of surcharging rules.

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We learned so many lessons from 2008. It couldn’t happen again — right?

Not so fast. Some of today's loan data points back to all-too similar numbers in the months before the Great Recession, a time when lenders significantly scaled back retail loans in all forms, from housing to credit cards. Yet now, 10 years later, some debt levels have surpassed 2008 highs, and charge-offs are on the rise.

Revolving consumer debt, which includes credit-card outstandings, hovered around $1.02 trillion June 30, according to the Federal Reserve. That's slightly higher than the $1 trillion from last September, which marked the first time debt had reached that level since January 2008.

At first glance, this looks a sign of good growth. Consumer confidence remains high, thanks to strong economic data. Unemployment was around 4 percent for June, according to the Bureau of Labor Statistics. Real gross domestic product increased at an annual rate of 2 percent in the first quarter, according to the Bureau of Economic Analysis.

This rosiness has led to more borrowing across the board, with credit cards being no exception. "People might be becoming more comfortable with the very long streak in good economic indicators," says Joanna Stavins, senior economist and policy advisor at the Federal Reserve of Boston. "They are going back to their old habits of borrowing with credit cards."

New omens, old patterns

Yet there are now similar omens of sorts, much like how rising defaults in 2007's subprime mortgages would eventually cascade to a near-collapse of the financial system. Yet this time around, it's not housing debt, but non-housing debt. Net chargeoffs for credit cards soared 22 percent to $1.3 billion, according to the Federal Deposit Insurance Corp. Chargeoffs for auto loans are up 28 percent to $199 million; other loans to individuals jumped 66 percent to $474 million.

That sheer amount of consumer debt classified as unlikely to be collected should also raise eyebrows. Consumer debt (excluding housing) totaled $3.82 trillion at the end of 2017, up 31 percent in 10 years, notes an Aite Group report, citing Federal Reserve numbers. Two-thirds of that debt is unsecured. Student loans make up 35 percent of that debt, auto loans, 32 percent, and credit cards, 22 percent.

Much of the debt has been racked up by younger borrowers, who don't fully grasp the consequences, says Kevin Morrison, senior analyst at Aite Group. "Clear warning signs signify that the overall U.S. consumer household debt is once again out of proportion to consumer income," he says. "Younger generations appear to be accruing debt at an unsustainable pace without a clear understanding of how much credit costs and how long it will take to pay it off."

2017 - Consumer debt (excluding housing) totaled $3.82 trillion. This is up 31% in 10 years. (Source: Alte Group)

A familiar chorus

Many subprime borrowers faced the downside of overleveraging back in 2007, when their income couldn't keep up with payments. Defaults in residential subprime loans started the cascade of events that would lead to the financial crisis.

Before things got really bad, there were signs in 2007 that things were heading south.

In February 2007, the Federal Home Loan Mortgage Corp. (Freddie Mac), announced it would stop buying the most risky subprime mortgages and mortgage-related securities.

In June 2007, Bear Stearns told investors it would stop redemptions on a leveraged credit fund. Ratings agencies that year started downgrading securities with exposure to subprime residential mortgages. By the end of 2007, delinquencies on single-family residential mortgages soared to 3.09 percent of loans, up from 1.91 a year earlier, according to the Federal Reserve Bank of St. Louis. Delinquency rates on credit cards rose to 4.6 percent, up from 4 percent.

By 2008, things accelerated, especially for banks with heavy exposure to mortgage-backed securities. Bear Stearns was rescued in March by JPMorgan Chase, in a government-brokered sale at $10 a share, down from its 52-week high of $133 a share. IndyMac failed in July, and Lehman Brothers and Washington Mutual Bank went bankrupt in September.

Meanwhile, banks essentially froze lending. By March 2009, The Dow dropped more than 50 percent since the previous October. Unemployment soared, peaking at 10 percent by October 2009, up from 5 percent from January 2009, according to the BLS.

The crash's consequences

The fallout for consumers was rough, as it was for credit card lenders, who shared millions of high-risk customers nationwide. For issuers, the credit crunch shut down capital access and shifted the focus from growth to portfolio management and damage control, recalls David Robertson, publisher of the Nilson Report.

"You had credit card issuers frantically trying to collect outstanding debt with those customers they knew were shaky," Robertson says.

Consumers increased use in debit cards. Credit card purchase volume fell 9.3 percent in 2009 to $1.76 trillion, while debit cards rose 7.5 percent to $1.48 trillion, according to the Nilson Report. Debit card growth outpaced credit card growth until 2012.

Around that time, fueled by a better economy and a spike in rewards programs, credit-card purchase growth once again started outpacing debit-card purchase growth. Credit-card purchase volume rose 9.6 percent to $3.35 trillion in 2017, compared with a 5.4 percent increase of debit-card purchase volume to $2.73 trillion, according to the Nilson Report.

"The rewards are so enticing, people have been lured back into credit card spending, bigger and better than ever, because the rewards are bigger and better than ever," Robertson says.

Many of those reward-savvy customers are not revolving, he adds. The trouble might be with the revolvers. About 61 percent of millennials revolve, versus 54 percent of Gen Xers, and 41 percent for Baby Boomers, according to research by Aite Group. Not surprisingly, the higher the income, the lower the percentage of revolvers. This revolving debt exposes issuers, Morrison notes. "There's no collateral to collect if they default."

So are we headed for a repeat of 2008? Time will tell, but consider taking note of the similarities that existed right before the Great Recession. Often financial crises start with a catalyst, an unraveling of one asset. It's just that the next downturn probably won't get triggered by residential mortgages, but by another asset class that's overleveraged.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Charles

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people’s living rooms thanks to the relaxation of surcharging rules.

His work at the American Banker included writing about credit and debit cards, merchant processing, and bank stocks. He later freelanced for the Banker and industry publications such as Banking Strategies, Bank Director, Community Banker, and U.S. Banker. He also writes about investing, insurance and health care, and is based in Los Angeles.

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