Investing in Bad Loans
Over the past three years there has been a tremendous increase in the amount of charged off credit card loans. This trend will continue for the next three to five years. Just look at these unbelievable statistics!• The average household is carrying credit card debt in the amount of $10,679.
• In 2006, the volume of charged off credit cards was $31 billion.
• In 2007, the volume of charged off credit cards grew to $39 billion.
• In 2008, the volume of charged off credit cards was $59 billion, a 26% increase over the previous worst year ever.
• In 2009, the volume of charged off credit cards $97 billion, a 212% increase in only four years.
• For 2010, the projected credit card charge off rate is 13% and would represent $117 billion of charge offs. The previous cyclical “high-water” mark for credit card charge offs was 7.1% -- 20 years ago.
• One in six households with credit cards can pay only the minimum balance due on their credit cards each month.
• More than 58 million adults, 26% of Americans, admit to not paying all of their bills by the due date. When finances are tight, 59% of people will pay their credit card bills last.
• More than two out of ten American adults have or have had a credit card that was 90 days or more past due.
• At year-end 2009, the reported credit card charge off rates for major banks were: JPMorgan Chase 18.9%; Bank of America 17.1%; Citigroup 15.4%; HSBC North America 11.4%; and American Express 8.4%. The CEO of JP Morgan Chase has predicted loss rates of 24% within the Washington Mutual credit card portfolio acquired by Chase.
• Credit card charge offs track almost exactly the unemployment rate (as noted in the graph below). Over the 10 year period 2000-2009, only twice was the variance significant; in 2001 following the 9/11 attacks and in 2005 when tens of thousands of consumers raced to file bankruptcy before the change in the bankruptcy code.
With 8 million jobs lost since December 2007 and the unemployment rate at its highest level in 26 years, in terms of job losses this has been the worst recession since the end of World War II more than 60 years ago. Not unexpectedly, consumers are reeling and struggling to pay the full balance on their credit card debt.
The number of people unemployed is 15.0 million. About half are considered “long-term unemployed” and have been unemployed more than 27 weeks. The number of persons working part-time for economic reasons (sometimes referred to as involuntary part-time workers) is 8.8 million. About 2.2 million people are “marginally attached to the labor force” and had not looked for work in the past 30 days. Another 1.1 million people are “discouraged workers” who have given up looking for work as they believe no jobs are available.
Official forecasts project unemployment to remain in the 9-10% range throughout 2010, decline to 8.2% in 2012 and continue gradually declining to 5.5% in 2016. Others, less optimistic, predict unemployment to continue rising to a peak of 10.75% in mid-2011 before beginning a slow and gradual decline.
Regardless of pessimism or optimism, the nation is clearly facing a sustained period of high unemployment. Because there is such a remarkably close correlation between unemployment and the credit card charge off rate, it can only be expected that the supply of charged off credit cards will continue to be enormous.
Credit card lenders are trying to protect themselves by tightening credit limits, rising standards, and closing accounts. They have also been slashing rewards, raising interest rates and increasing fees to cushion further losses.
All of these factors demonstrate a continued strong supply of freshly charged off credit cards to be purchased in the market. There has never been a better opportunity for entrepreneurial start-ups to launch and prosper in this industry.
“Big opportunities do not come around often. When it’s raining gold, reach for a bucket, not a thimble.” - Warren Buffett
Do you want to capitalize on this big opportunity in the arena of debt buying?
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