Future of Credit

[piercehawkeye45]

First off, I would like to state that I know very little about this subject so just let me know if this question is not valid or at least some underlying assumptions leading to my question are not valid. My knowledge of credit is that banks will loan out money to people in the forms of credit cards, loans, or whatever, and the banks make money off interest rates from preset loan conditions or penalty rates from missed payments. I personally have never been charged with a missed payment and I will continue to do this but I luckily have not have to taken out a loan at this point.


So, yesterday I was talking to someone in his early 30s who has a secure job and family and he mentioned how he almost bought a bunch of houses in his neighborhood for cheap and then would make the money back in the form of rent. His logic is that since many people of my age, late teens and early twenties, will have really bad credit scores, they will not be able to take out house loans and will be forced to rent, therefore renting from him.

We then discussed how people are getting more irresponsible with credit and how many people will not be able to take out house loans, car loans, etc.

So my questions are, first, if this is true or just an overblown speculation? Then, how would this effect our credit system if banks do not trust the majority of people to take out house loans, sacrificing potential profits? As I said, I don't know much about this besides being responsible with credit, but wouldn't a large distrust between banks and loaners cause HUGE problems with the house industry? And if this is true, is their any speculation on possible ways those industries will evolve because of this?

[TheMercenary]

There is not a huge distrust between lenders and loaners. If there was such a great risk to their profits they would not loan the money. But understand, up to this point, much of the laws regulating the banking industry (including the loaning industry, because you don't have to be a bank to loan money) has been written by their cronies in the various seats of power, at both a state and national level. The huge influence these industries have on lawmakers comes in many forms among them are payment to re-election and through lobbyists. Obviously the spotlight is on them now and in the last 2 years or so and they are all running and trying to distance themselves from the past. But if you examine who these industries gave money to in the past and look at the bills they passed into law it is pretty clear. Money is power in politics.

Originally Posted by piercehawkeye45

...So my questions are, first, if this is true or just an overblown speculation? Then, how would this effect our credit system if banks do not trust the majority of people to take out house loans, sacrificing potential profits? As I said, I don't know much about this besides being responsible with credit, but wouldn't a large distrust between banks and loaners cause HUGE problems with the house industry? And if this is true, is their any speculation on possible ways those industries will evolve because of this?

Credit card debt has skyrocketed in the last 10-15 years, currently over $1 trillion, and growing at about three times the rate of new credit cards being issued.

What that means is that millions of people owe far more on their credit cards than any previous time (on average three times as much - while average personal income has not increased by three times as much). As a result, millions of people are late in making even the minimum monthly payments, affecting their credit scores (over half of all credit card holders make only a minimum monthly payment) and millions more are choosing bankruptcy to erase the debt than any previous time and that number is growing...and the banks absorb those losses.

The banks have tried to protect themselves with various hidden charges and exorbitant fees...but the Credit Card Bill of Rights legislation that was enacted last year will put an end to many of those practices. As a result, banks are likely to tighten their policies on issuing new credit cards. At the same time, many of those millions of people who declared bankruptcy will be frozen out of the credit market for 7-10 years.

But, more than anything else, it is a matter of personal financial responsibility....for many, it is probably too late.

added:
The other issue that will adversely impact credit in the short term is the pending crash of the commercial real estate market with many banks wayyyy over exposed as a result of greedy, overly aggressive speculative (and unregulated) lending practices in this market...to the tune of $3-4 trillion. And when that happens, credit will shrink again.

[Clodfobble]

Originally Posted by piercehawkeye45

Then, how would this effect our credit system if banks do not trust the majority of people to take out house loans, sacrificing potential profits?

The banks won't really be sacrificing profits in this case, because the number of actual houses/loans has not changed. Instead of giving 10 loans to 10 families, the bank is giving 10 loans to your one friend, and he is collecting rent from the 10 families. They are still collecting the same amount of total interest from your rich friend. Things only get bad for the bank (and for your friend too, incidentally) when houses start going empty--because single people start consolidating into roommate situations, unemployed people move back in with relatives, college-age kids decide not to move out into their own apartment after all, etc.

[Undertoad]

Things go bad for the friend when he has a secure job AND 10 rental properties full of young, bad-credit tenants to manage.

[Clodfobble]

Well sure, he's taking that extra risk on himself by deciding to become a landlord. I've heard more than enough rental horror stories that I would never, ever deal with renting out a property unless I personally knew the tenants, and even then it would have to be extenuating circumstances.

[squirell nutkin]

you might want to google "money as debt" and watch the youtube video about the subject. good intro.

[TheMercenary]

Originally Posted by Redux

Credit card debt has skyrocketed in the last 10-15 years, ....

Don't let him fool you piercehawkeye, the God Damm Demoncrats are a big part of why we got into this problem in the first place. Like I said eariler, follow the money.

[tw]

Originally Posted by piercehawkeye45

So, yesterday I was talking to someone in his early 30s who has a secure job and family and he mentioned how he almost bought a bunch of houses in his neighborhood for cheap and then would make the money back in the form of rent. His logic is that since many people of my age, late teens and early twenties, will have really bad credit scores, they will not be able to take out house loans and will be forced to rent, therefore renting from him.

The belief that renting would be a good investment was very popular this past year. But statistics say the trend has been to move in with friends or family. Those expecting to profit from an increasing number of renters, so far, have been economically disappointed.

Second, some data suggests home prices have not yet fallen sufficiently yet. A large numbers of home that should be put on the market are being withheld. Many banks not even foreclosing just so their homes stay occupied for now. IOW are those homes currently priced low? Will a still to go lower housing market create losses that the rent will not cover? These are difficult and risky questions because numbers are currently so vague and contradictory – and may be different in that locale.

Originally Posted by TheMercenary

Don't let him fool you piercehawkeye, the God Damm Demoncrats are a big part of why we got into this problem in the first place. Like I said eariler, follow the money.

If you follow the money over the last 20 years, it has gone far more to Republicans than Democrats. (59% - 41%)
http://www.opensecrets.org/industries/indus.php?ind=F03

But the credit market is not about this as much as it is about increasing personal credit debt that is unsustainable at current levels and bad credit decisions on the part of lenders and borrowers.

[classicman]

Ohhh lets all point fingers. They are all too blame. We are all to blame.

Originally Posted by classicman

Ohhh lets all point fingers. They are all too blame. We are all to blame.

Hey...just setting the record straight on the suggestion to "follow the money" since it was raised...the money trail speaks for itself.

But, IMO, again, that is not the issue nor, IMO, does "They are all to blame...We are all to blame" address the questions that piercehawkeye raised about the future of credit.

This is a good column from Fox ( ) on credit card debt and the potential impact on the economy:

U.S. Consumer Credit Card Debt May Crash Economy

While the number of people holding charge cards grew about 75 percent— from 82 million in 1990 to 144 million in 2003— the amount they charged during that period grew by a much larger percentage: approximately 350 percent, from $338 billion to $1.5 trillion.

Since the number of chargers is growing at a slower rate than the amounts being charged, you can guess what that means. Yes, the monthly revolving balances have been growing by leaps and bounds. In 1990, the Times reports, the average was about $2,550 for those households that carried a balance. At the end of 2003, that balance averaged about $7,520 – an increase of nearly 200 percent!

And that's only credit cards. The average U.S. household owes mortgage debt, student loans and automobile loans, in addition to credit card debt.

It's because credit has been so easy to get that we've managed to inflate people's ideas of how much they can take on. Barron's recently published a striking chart, showing Household Surplus (more income than outgo) compared with Household Deficit.

Throughout the 1960s, '70s, '80s, and '90s, households showed a surplus of varying degrees. It wasn't until 1999 — for the first time in about 50 years — that U.S. households started spending more than they took in. What started as a small deficit of about $50 billion among households quickly spiked to a deficit of more than $350 billion in the second quarter of this year.

Pretty much what I said in my first post....and ultimately did contribute to the crash of 07-08, along with the bursting of the housing bubble that occurred at the same time.

While the column is from six years ago, the personal credit crisis has only got worse since then.

The ratio of debt to income is continuing to increase (pdf) and it is highest among the youngest consumers and far higher than it was 20 years ago, when people were more disciplined and less inclined to spend beyond their means.

That $50 billion personal debt in 1999 rose to $350 billion by 2003 and now in excess of $1 trillion.... this is unsustainable and, along with a pending burst of the commercial property market, will adversely impact the future of credit.

Or you can take the Merc answer for everything and just blame the Democrats.

[piercehawkeye45]

Originally Posted by squirell nutkin

you might want to google "money as debt" and watch the youtube video about the subject. good intro.

Good video if you cut out all the conspiracy theory crap. But thanks.

Originally Posted by Clodfobble

Things only get bad for the bank (and for your friend too, incidentally) when houses start going empty--because single people start consolidating into roommate situations, unemployed people move back in with relatives, college-age kids decide not to move out into their own apartment after all, etc.

I guess this is what I'm trying to get at. I'm still trying to sort through Squirell's video by verifying the truthful parts with outside sources but the way I understand it is that loans and credit are what keep our economy growing and if credit scores are so bad that people stop taking out loans, wouldn't that greatly hurt the economic growth of the country? On a slight tangent, our current recession is due, at least in part, to the lack of loans out in the housing market?

[TheMercenary]

Originally Posted by Redux

Or you can take the Merc answer for everything and just blame the Democrats.

Or you can look at the following categories, not just commercial banking as you listed.

Finance, Insurance & Real Estate
Commercial Banks
Savings & Loans
Credit Unions
Finance / Credit Companies
Securities & Investment
Venture Capital
Hedge Funds
Private Equity & Investment Firms
Insurance
Real Estate
Mortgage Bankers & Brokers
Accountants

With the exception of Insurance and Accountants the money has overwhelmingly gone to the Demoncrats looking at the election cycle of 2006, 2008, and 2010. The time since the Demoncrats became responsible for the mess we are in and their majority in Congress.

http://www.opensecrets.org/industries/slist.php

Once again you have tried to re-write history. Your party own this and has the responsibility now to fix it. For more than 2 years they have failed and the electorate has noticed. See you in Nov.

The current credit crisis did not begin in 2006 but in 1999 ...the tightentng of the market first reached the crisis point n 2006 (as predicted in the FOX column).

That $50 billion personal debt in 1999 rose to $350 billion by 2003 and now in excess of $1 trillion.... this is unsustainable and, along with a pending burst of the commercial property market, will adversely impact the future of credit.

To ignore the rising credit card debt over the last 10-15 years that led to that point is to ignore one of the key negative forces behind the current credit market.

And, IMO, most credit card holders will benefit from the credit Card Holders Bill of Rights legislation signed into law last year and taking effect this month...but that still wont fix the credit market.

That will require regulatory changes in the future along the lines adopted by the House earlier this year.