GE Consumer Finance latest casualty of Japanese crackdown

The move marks another convulsion in Japan's consumer finance industry, which has been clobbered by the stricter lending rules. The harsher business environment has already prompted Citigroup to close 80% of its consumer finance branches in Japan at a cost of $415 million, and has triggered heavy losses at virtually every Japanese consumer finance firm.

Analysts say there is concern a decline in lending by consumer finance firms could cause a credit crunch, harming Japan's economic recovery, especially as consumer spending still remains weak amid lackluster growth in wages.
U.S. credit-card debt grows at slowest pace in 10 months
WASHINGTON (MarketWatch) - U.S. consumer credit-card debt growth slowed again in January, rising at an annual rate of just 1.1%, the lowest since last March, the Federal Reserve reported Wednesday. Overall, outstanding consumer debt increased $6.4 billion, or 3.2% annualized, the Fed said. The increase matched the expectations of economists surveyed by MarketWatch. Revolving credit, such as credit cards, increased $816 million, or 1.1%, in January. Nonrevolving credit, such as auto loans, increased $5.63 billion, or 4.2% annualized
Rhetorical question, why can't people keep borrowing if they can't sustain the debt service?

Towel Talk: Flooding the subprime zone

Dow Jones & Company Inc.'s (NYSE: DJ) Wall Street Journal (A.K.A, The Towel) occupies a unique spot in the media firmament. As I pointed out earlier in the year, it changed its footprint and now looks to me like a Holiday Inn bath towel. Towel Talk offers a perspective on its news and views.

Last Saturday's Towel hit the declining $1.3 trillion subprime mortgage market hard -- with two articles and the lead editorial. Since the stock market won't be open until Tuesday -- the Towel's timing will either give investors a long time to stew about subprime's woes or to forget them as they ski in Aspen or warm themselves in the Turks and Caicos. But does the Towel's wide coverage also signal the end of the trend?

The best of the three articles was The Subprime Market's Rough Road [subscription required for all Towel links] since it included statistics which paint a compelling picture of a widening subprime collapse, including the following:

Subprime loans have grown to 12.75% of the $10.2 trillion mortgage market in 2006, up from 8.5% in 2001
47% of subprime loans are "creative" -- up from 2% in 2000 -- featuring "piggyback" loans which require no down payment and "no-doc" loans that let borrowers state their incomes without supporting documentation. While this creativity works fine when housing prices rise -- if a borrower defaults, the lender can profit by selling the property -- it does not work when housing prices are going down.
80% of subprime mortgages are exploding ARMs (adjustable-rate mortgages) with low fixed-interest payments in their first few years which later adjust to higher interest payments. When the ARM adjusts upward, some borrowers can't afford to pay. The resulting foreclosures lead the mortgage company to sell the house to get back some of the loan principal. The sudden increase in the supply of houses on the market puts further downward pressure on prices.
Nearly 1.2 million foreclosure filings were reported in 2006, up 42% from 2005, representing one in 92 U.S. households. This trend will worsen if interest rates rise.
Borrowers have never been more leveraged. Loan-to-value ratios, the loan amount expressed as a percent of the property value, have grown to 86.5% last year from 78% in 2000. With all the new supply on the market, these loan-to-value ratios are likely to rise as the values decline. This will mean steeper loan writeoffs for mortgage lenders which will deplete their capital.
At least 20 subprime lenders have filed for bankruptcy or have been sold. As mortgage-backed securities buyers exercise their rights to force mortgage originators to buy back the bad loans, the loan originators will likely be unable to come up with the buyback cash -- leading more of them to file for bankruptcy.
Sharp Drop in Housing Starts Adds To Fear of Wider Economic Impact included some other important factoids:

In November, payments were late -- 60+ days overdue -- on subprime loans packaged into mortgage securities on 12.9% of the loans, up from 8.1% in 2005.
At one house builder, sales-cancellation rates in Phoenix soared 70% in certain months in 2006, and averaged 50% for the whole year.
170,000 housing-related jobs have been cut since April 2006
The Towel's editorial, How Expansions Die, surprised me a bit because it mostly resisted The Towel's editorial bias toward blaming problems on the Al Qaeda-loving, tax-raising Democrat party. However, it could not resist warning that Congressional investigations into predatory lending would lead to tougher lending standards and a further credit crunch.

Overall I like the Towel's coverage of the subprime mortgage industry and hope it begins to investigate further the subprime value network -- the organizations that lend to, insure, credit rate, regulate, securitize, trade, and invest in subprime mortgages and the mortgage backed securities into which those loans are packaged. Given the growing systemic risk of this evolving problem, a thorough analysis of these links in subprime's value chain is critical to weighing its ultimate economic impact.

I would really like to know more about the experience of those who took on subprime mortgages. Why did they do it? What were they thinking about the risks? How did things work out? If you've invested in subprime stocks or are paying back a subprime mortgage, what are your thoughts?

To me it looks like the declining trend is far from ending.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Dow Jones.

China’s eyes on dark continent
The European Investment Bank (EIB) president Philippe Maystadt renewed warnings yesterday about aggressive Chinese lending in Africa, which he said could drive up debt levels dangerously.
The head of the European Union’s financing arm said the EIB was facing increased competition from Chinese banks in Africa who were willing to lend on easier conditions.“There’s been a few projects (in Africa) that we were working on and which in the end were financed by Chinese banks,” Maystadt said during the presentation of the EIB’s 2006 results.
He also called on Chinese banks to apply tougher lending conditions on the “economic viability” of projects and “good governance”, and impose environmental and social requirements.
“For some African countries, if funding comes too easily they are at risk of running up excessive debts,” he said.
[Emphasis is mine]

Ah, I find this quite interesting! Can you say "Global Player", how long until they buy enough world support for their claim to have Taiwan under their grip.

Umm, random thought...