That word describes credit card debt and the trillions of dollars that Americans cash out of their homes in the form of home equity withdrawals and refinances.
That is, banks often encourage consumers to use their home equity to pay off mounting credit card balancers. In doing so, borrowers convert unsecured revolving loans (their credit cards) into debt secured by their homes, effectively using their homes like an ATM.
Such was the story on the front cover of the USA Today yesterday, in an excellent piece by Kathy Chu and Byron Acohido. A parallel story was also shown on ABC News with Charlie Gibson.
Since 2000, banks have rapdily increased the credit limits on credit cards sent to “subprime” cardholders. These same customers were often encouraged to consolidate this debt into their mortgages when they refinanced.
And with home values coming down or leveling off in many metro areas, the end of the buy-everything-you-can-and-charge-it era might be over. Or, at least we’d hope that bank regulators would actually keep an eye on it from now on.
I’ll use this excerpt from Adam Levitin on creditslips to take it home:
http://www.creditslips.org/creditslips/2008/05/credit-card-deb.html#more
But for so many people tapping into the home piggybank in recent years, we would be seeing far higher levels of credit card debt (and defaults). Now that the home piggybank is empty, credit card defaults are running up fast. But credit card debt is actually much lower than it would otherwise be, but for the home mortgage bubble. And while a default on a credit card doesn’t cost you your home, the interest runs up much faster than on a mortgage.
To the extent that we’re already concerned about the level of credit card debt in the US, shudder to think what it would look like without the mortgage bubble. Maybe consumers would have purchased fewer flat screen TVs and less gas for the car and milk for the kids if they had to pay for it with high cost credit card credit rather than with low cost mortgage credit. But I suspect we would still have seen a lot of the same spending, so instead of facing a foreclosure crisis, we would instead be facing a much more pronounced version of the credit card debt problem. The future would be here now.
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