“OH, C’MON, SIR. DON’T YOU THINK YOU DESERVE THIS?”

9/4/09

This morning’s (i.e., Friday, 9/4/09’s) Wall Street Journal reports that, as the headline on page C1 put it, “Troubles for ‘Prime Borrowers’ Intensify.” The gist of the article is that the delinquency rate on so-called prime loans, while still far lower (by a factor of almost 4) than the delinquency rate on sub-prime loans, is accelerating at a far faster pace than the delinquency rate on sub-prime loans. Further, HSBC, a not at all atypical credit card lender, reports that its prime credit card loan portfolio is performing worse than its sub-prime credit card portfolio.

This news on the accelerating deterioration of “prime” loans might surprise many people, but not regular readers of the Insightful Pontificator. The artificial nature of the prosperity that our economy seemingly experienced through much of the last decade of the last millennium and the first decade of this one has been a recurring theme of these posts. See, inter alia, probably my best musings on this issue, my 3/11/09 piece, “BUT I SERVE AN UPSCALE, RECESSION PROOF CLIENTELE…”

The explanation for the increasingly woeful state of our nation’s “money good” borrowers is, according the article, that prime borrowers have more “financial levers” to pull to keep them out of trouble. They have been able to use these tools, such as dipping into savings (Ha! Savings? Remember when financial “experts” were telling us only chumps had savings in actual cash money? And our consumption obsessed society used that codswallop as a rationalization for p---ing away every last dollar and then some? Grist for yet another post…in addition to the, oh, hundreds or so I have written on this topic.), borrowing against the house, reducing contributions to retirement plans, etc., to keep their heads above water. Sub-prime borrowers, who had no access to such life preservers, just sunk. They defaulted and were written off by the credit card companies and mortgage lenders long ago, so their problems are, largely but by no means completely, behind the lenders. Meanwhile, the prime borrowers are of late running out of rabbits to pull out of their hats and now are increasingly in default on their mortgage and credit card loans.

That explanation seems logical, but I prefer another one that I elucidated in that already referenced and pullulatingly seminal 3/11/09 piece, “BUT I SERVE AN UPSCALE, RECESSION PROOF CLIENTELE…” To wit, these supposedly money good borrowers never had any money in the first place, or at least not enough money, or even income, to support their lifestyles, lifestyles that, only a generation ago, would have seemed lavish by any measure. What they had, instead, was access to liability creation born of an out of control credit market and other-worldly underwriting standards. The financial whiz kids with their eight figure bonuses assured us that the old lending and borrowing maxims were hopelessly out of date due to their studied application of the Frankensteinesque “tools” they designed, but clearly did not understand. Since the risk had been eliminated, or at least carefully calibrated and controlled, according to Wall Street, and the making of a loan was completely divorced from the holding of a loan, underwriting standards became lax to the point of nonexistence. Legions of American consumers, fortified with the certainty that they were entitled, on the day they got out of school, to live as well as their parents ever had, jumped on the “opportunities” such financial chicanery afforded them. Then a collective utterance of “Whoops!” emanated from the financial world, and the consequences were predictable…and still probably have not played out entirely.

Indeed, today’s aforementioned Journal article states:

“For prime borrowers, this recession has been especially tough because declining home prices have taken away one of the typical crutches for them since it is harder to tap the equity in their homes to pay their bills if they lose their jobs, according to a report issued this week by Standard & Poor’s.”

But even this tidbit from the Standard & Poor’s report misses the point. People weren’t using the equity in their homes to pay their bills because they lost their jobs. They used the equity in their homes to pay their bills, usually through the circle jerk of refinancing their credit cards at “low, low home equity rates,” as a matter of routine even when they still had jobs. This “tapping the equity in your home to get the things you want…and deserve” ruse has been the backbone of the financial finagling that sustained the faux prosperity of the last twenty years or so.

And now the chickens have come home to roost. Surprised? Not if you’re a regular Insightful Pontificator reader.