Consumers Miss More Debt Payments; Lenders Move to Stem Losses

By Helen Chernikoff | February 10, 2009

U.S. consumers are falling further behind on their debt payments even as both borrowers and lenders struggle to keep the debt burden from getting even heavier in the face of a worsening recession and employment picture, a credit bureau executive told Reuters.

Dann Adams, president of U.S. Information Systems for Equifax Inc, said consumers are missing payments on mortgages, credit cards and auto loans, prompting lenders to further scrutinize borrowers’ profiles for signs they should clamp down on credit.

“Lines of credit are being very closely monitored,” said Adams, whose clients include banks struggling to prevent more bad debt from piling onto their balance sheets.

Banks are, for example, warily watching their credit card portfolios in anticipation that consumers whose home values are plunging will turn to credit cards as their home equity lines of credit are cut or canceled.

They are also preemptively culling inactive cards, seeing them as a potential liability: “If the consumer gets in trouble with someone else they’ll start using the bank’s card, and the bank doesn’t want them to do that,” he said.

Customers whose credit scores are on a downward trend are finding themselves on the receiving end of more aggressive action to limit or cut off credit.

And more lenders are requesting an Equifax product called “bankruptcy scores” that expresses the probability that an individual will be bankrupt over the next one to two years, Adams said.

But Adams is careful to note that this is “a supply-demand contraction.” Consumers are likewise saving more, and growing leery of new debt.

The retrenching on both sides is part of a “rebalancing” underway in the banking system that will insure safety and soundness in the long term, Adams said. But closer in, the tightening of purse strings is exacerbating the recession as consumers miss payments, traumatized banks pull back and the economy contracts further.

“We’re not seeing a real positive trend in anything we track,” Equifax’s Adams said.

SPENDING DOWN, SAVING UP

Economic conditions in the United States are expected to worsen.

Employers laid off almost 600,000 workers in January, the deepest cut in payrolls in 34 years, pushing the national unemployment rate up to 7.6 percent, according to a Labor Department report Friday.

And in the fourth quarter, the U.S. economy shrank at nearly its fastest pace in 27 years, contracting at a 3.8 percent annual rate, the Commerce Department said.

That decline was actually not as deep as analysts expected, which translates into a burden for coming quarters and even grimmer forecasts, analysts said.

Households spooked by the shaky economy are finally opting to build their savings after years of spending. The personal saving rate surged in December to 3.6 percent of disposable income, the highest since May, from 2.8 percent in November, the Commerce Department said Tuesday.

Economists have long warned that U.S. households were taking on unsustainable levels of debt.

Consumer spending, which accounts for two-thirds of U.S. economic activity, fell at a 3.5 percent rate in the fourth quarter, marking the first time in about 18 years it had contracted for two straight quarters.

BLEAK METRICS

But as they try to save, consumers are hobbled by the debt they have already incurred.

Total personal bankruptcy filings rose 44 percent year over year in December, according to Equifax. Filings under Chapter 7, which liquidates the assets of those unable to pay their debts, rose 67 percent while Chapter 13 filings, the so-called “wage-earners bankruptcy” that establishes a payment plan for debtors, rose 16 percent.

The number of people struggling to make their credit card and car payments is also on the rise. In December, almost 4 percent of payments on bank-issued credit cards were at least 60 days late, up from last year’s 3.26 percent.

In December, 1.7 percent of borrowers of auto loans from carmakers were 60 days behind, up 4 percent from November and 16.2 percent from last year.

Banks are retreating in response. At the peak in July 2008 there were 438 million open bank-issued credit cards; in December there were 414 million. Credit card limits also peaked in July, at $3.59 trillion, and fell to $3.47 trillion in December.

On the home front, where the credit crisis started, a whopping 38.3 percent of subprime homeowners were 30 or more days behind on the loans on their primary residences in December, up 23.9 percent year-over-year.

But Adams is not totally pessimistic.

“Credit is a great tool and expands the economy when used appropriately,” he said. “We’ve just gone through a significant imbalance and we will return to some normalcy.”

(Reporting by Helen Chernikoff and Lucia Mutikani; Editing by Patrick Fitzgibbons and Tim Dobbyn)

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