Credit Write-Offs Not as High as Feared
Posted by: Henry Baum | Mar 25,2008
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There’s a misconception about the credit crisis. When people hear that term, they’re likely to think there are grave problems with the credit card industry. In fact, the credit crisis or credit crunch refer to loan problems overall, and the vast majority of loans are in the mortgage sector. It’s been estimated that 50% of write-downs as a result of the credit crisis are for residential mortgages. Another 20-30% is for commercial mortgages, totaling a majority of 80%. The rest is built by other types of loans, including credit cards.
For the most part, though, the credit card industry is going strong. Credit card profits are up, despite all the talk about the current crisis. The reason is that people are looking towards credit cards to pay everyday expenses, as well as the fact that even low-interest credit cards have much higher interest rates compared to other types of loans. One other issue at stake is the fact that credit card “foreclosures,” in which a borrower no longer pays off the debt, have much less of an impact than a home foreclosure. Simply put, credit card debt is much less than most any mortgage.
Mortgage Write-DownsSo the mortgage industry is what is mainly responsible for the credit crisis. The term “Credit crisis” is even a misnomer: mortgage crisis would be even more appropriate. Given that mortgage comprise the bulk of credit problems, the concentration needs to be on the mortgage industry in terms of regulations and how deep an affect mortgage issues are having. There is reason for some optimism in terms of the amount of write-offs as a result of the crisis.
For example, GS Global Economic announced only 120 billion dollars in write-offs. While this is obviously a huge sum of money, it’s not a crippling amount that could potentially bring down a powerhouse. The fire sale of Bear Stearns earlier in the week was a bad omen for the rest of the financial industry. But the write-offs have not been as bad as some have feared.
At least not yet. And there is still reason for pause. Certain financial figures do not make it into the mainstream, such as hedge funds, so the financial portfolio or investment banks, mortgage companies, and other institutions that have far-reaching economic interests could be much more damaging than has been reported. But in a time of such economic uncertainty, when mighty powerhouses are falling, it’s good to see a sliver of good news whenever possible – even if it amounts to: they’re losing money, but they’re not going under.
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