Next Credit Woes in the Brewing?

Sub-Prime
Sub-prime (about US$900 billion) was largely attributed from America’s high Loan to Valuation (LTV), high interest rates and falling property valuation. Loan package was so attractive during the first year of loan (possibly 0%) and escalate on the 2nd year onwards (potentially 7-8%), that caused borrowers to default on payment.

Fed Reserve’s Rate Adjustment
With US Federal Reserve’s interventing action on 18 Sept 07, to reduce subsidized lending rate from 5.25% to 4.75%, it helped cushioned a the fallout and near recession. The more recent adjustment on 31 Oct 07 saw interest rates going down to 4.5% now. But with the latest adjustment, it has not done good as another problem has surfaced.

Credit Problem
The new problem was expected even before Sub-prime was an issue. A lot of people are living on borrowings or future earnings. This sign is even prominent here in Singapore and we have to be wary of a potential late 1990s financial problem (not just Asian Crisis). This new problem is related to their credit cards debt (about US$915 billion)

Payment Defaulters
What will happen next? Before borrowers became mortgage delinquents, some had relied on their credit cards facility to help them pay for their installments. Now that they had exhausted their credit lines and looming mortgage, the problem in America’s financial market can be worst than August 07 (Sub-prime). We are seeing a domino effect.

Those securities (homes) would decline in value as consumers defaulted, leading to bank losses as well as portfolio losses in the hedge funds, institutions, and pensions that own the securities. If the damage is widespread enough, it could wreak havoc on the economy much as the subprime crisis has done.

Credit card debt is different from subprime debt. Unlike mortgages, credit card debt is unsecured, so a default means a total loss.
(source http://finance.yahoo.com/banking-budgeting/article/103811/The-915B-Bomb-in-Consumers'-Wallets)

America’s Economy
How do I relate America’s economy woes to the world? America is the World’s No 1 Economy, with California being World’s 10th largest Economy. With these figures, wouldn’t we be worried about the health of their economy? (Source : CIA’s World Factbook, 2005 estimates).

Household Income
The 80% of American household income (pre-tax) are no more than US$65,000 per annum. This means they have less than US$4,800 per month per household (after 12% average income tax). How much disposable income would the household have (not forgetting, mortgage payment, car loan, credit card, daily expenses, etc).

Annual income parking ramp
Income level (percentile) --> Median income (rounded)
Level VI (90 to 100) --> $170,000
Level V (80 to 89.9) --> $99,000
Level IV (60 to 79.9) --> $65,000
Level III (40 to 59.9) --> $40,000
Level II (20 to 39.9) --> $24,000
Level I (less than 20) --> $10,000
(Source: Before-Tax Family Income, 2001 Federal Reserve Board Survey)