Unless you’ve been locked in a cave for the last year or two, you are probably aware of the financial crisis. Home loans were handed out like lollipops on Halloween. Unsuspecting prospective home owners were given what they thought were “treats” that turned out to be tricks. THese were loans on unaffordable homes that will lead them into foreclosure and are leading to an unwinding of highly leveraged worldwide financial markets.
For years, the US has lived on credit and imaginary “wealth”. Much of this imaginary weath was tied to home values. In a market where home prices could only go up, you could buy a house with no money down and take out an Option ARM (Adjustable Rate Mortgage) and have the option to make a payment so small tht the balance of the loan would actually go up each month. There were many other creative financing options made avaialble to promote home “ownership” as well. Once you “bought” a home and the value went up, you could refinance and take money out of the housing ATM or simply take out a home equity loan. The Sub-prime debacle is already in full swing and there is more to come as shown in this article on the the tidal wave of mortgage resets coming our way.
When consumers are desparate, when their homes are worth less than the outstanding balance on their home loans, when they can no longer tap home equity loans, when they are experiencing stagnant wages or losing their jobs, where are they going to turn? Why credit cards of course. It is the American way!
It is nice of Citi to at least acknowledge that their credit card losses “may” rise though 2009. Shouldn’t that say WILL rise through 2009 (and probably dramatically)? Lookout below! We’ve got billions more in exotic mortgage resets coming in the next few years, probably billions in unsecured credit card losses by the likes of Citi and other banks ready to hit as people pay their mortgages (and everything else) with their credit cards.
If it wasn’t such a bad situation, it would be comical to see how this financial crisis is being handled, the PR used to spin major losses and how the tax payers are being fleeced to try to fix this whole problem.