The Subprime Meltdown Is The Tip Of The Credit Iceberg

The ongoing subprime meltdown is merely the first destructive wave of credit catastrophe to wash over Wall Street, according to Slate’s resident explainer. Americans drunkenly bandy credit around in several forms: mortgages are the most prevalent loans turning sour, but credit card debt, student loans, and auto loans are silently conspiring to threaten our macroeconomic well-being.

Other types of consumer debt, which have nothing to do with housing and nothing to do with subprime, are going bad, too. The Wall Street Journal reported today that “about 4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9% the previous month, according to a Lehman Brothers survey of companies servicing these loans.” In October, Fortune’s Peter Gumble warned that a similar plague may soon afflict credit-card companies. In October, credit-card giant Capital One Financial reported that the delinquency rate on credit cards for the third quarter of 2007 was 4.46 percent, up from 3.53 percent in the third quarter of 2006. “Given current loan growth and delinquency trends,” Capital One reported, it “expects the U.S. Card charge-off rate to be around 5.25 percent in the fourth quarter.”

The stock of First Marblehead, which has enjoyed explosive growth making private (i.e., not federally guaranteed) student loans, has been hammered in recent days because Moody’s, the ratings agency, concluded that loans it had made “appear to be defaulting at a significantly higher rate compared to loans originated through school financial aid offices.” The Wall Street Journal reported that “seventeen months after First Marblehead arranged one 2005 package of student loans, 2% had defaulted, according to the company’s monthly reports to note holders. But last month, a comparable 2006 package–also 17 months after issue–had a default rate of 3.98%.”

So what does all this mean to you? The imploding subprime market is already driving up the price of consumer credit—loans of all stripes are more expensive—but things could potentially get much worse. Somewhere between “manageable bad” and “let’s all walk to California and write about the Dust Bowl” bad. If we had the means, we’d come up with catchy colored Livestrong-y “My Debt Is Under Control!” tchotchkes. But since we don’t, we’ll simply beg: please use your credit responsibly.

Debt Be Not Proud [Slate]
FURTHER READING: The Grapes Of Wrath [Amazon]
(Photo: Wikipedia)