Reliance on Credit Cards Reflects Subprime

Daily Real Estate News August 29, 2007

FalloutThe credit card business to date seems to have escaped the growing reach of the subprime meltdown, with card delinquencies remaining flat even as defaults have skyrocketed among homeowners, but analysts at Merrill Lynch say the sector's resistance to the turmoil be weakening. "The next shoe to drop from this subprime mortgage fiasco, which has already fed into the asset-backed market, is probably going to be the credit card business," according to Merrill Lynch economist David Rosenberg.

Credit card borrowing was up 11 percent in May and June, likely because homeowners are using plastic to pay for daily expenses to free up more cash to make their mortgage payments. Moreover, while borrowers previously have tapped into mortgage equity to produce the money needed to resolve credit-card and other debt, a Goldman Sachs report notes that "cash-outs" peaked during the fourth quarter of 2005.

Source: Investor's Business Daily, Reinhardt Krause (08/27/07)