Foreclosure Crisis May Affect Credit Cards, Entire Economy

Posted on December 11th, 2007 by saman

The foreclosure crisis continues unabated sending new ripples through our economy with every group of new ARM interest rate resets, defaults and foreclosures. However, many feel that the full effects of this huge market correction are yet to be fully seen. We all know, however, that it all started with the sub prime lending meltdown and that it is currently affecting the financial circumstances of each and every consumer, including those who are not at risk of being foreclosed. Home values across the board are already declining and disruption of credit markets will continue.

In today’s financial world, debt is a hot commodity and sub prime mortgage debt was conveniently folded into investment packages that were readily snapped-up by eager investors. When they purchased these packages they were, in fact, gambling that the debt would be honored and that the interest rates earned would be their financial reward. That’s certainly not the way it worked out.

As of today, investor losses have been in the billions of dollars and they’re still climbing. The losses make it difficult if not impossible for the investors to unload due to the devaluation of their securities. Many of the investors now in this sinking boat are banks, hedge funds, pension funds and retirement funds. Credit card companies are now beginning to feel the pain because many foreclosed homeowners have filed bankruptcy, including a sizable amount of credit card debt. What can the credit card companies do? Obviously what they will do is pass along all or part of their losses to customers in the form of rate increases. Moreover, homeowners who will want to take out second mortgages on their homes will find them harder to get thanks to sinking home values and tighter lending standards.

As the downward spiral continues, retirement funds may be affected and more people now employed in financial and mortgage-related fields are likely to find themselves unemployed. Job losses in other sectors will be likely to occur as well if the economy slips into a recession as 50% of financial professionals now predict it will.

The bottom line of this situation is that eventually all Americans will feel the pinch in one-way or another. And the only people who may escape unscathed are the people who started the whole problem should the feds save them from any consequences with another bailout plan.

The new federal plans to help prevent some from future mortgage foreclosures and to make lenders stop giving them to people who can’t afford the payments may help a bit. But there is no shortage of critics who truly believe it is too little too late and that recession is still a likely probability sometime between now and the end of 2009. All we can do now is wait and see who is right and, if we’re smart, look at it as a worst-case scenario and make our future financial plans accordingly.