Defaults and Late payments on home-equity loans and credit cards are climbing to the highest levels. According the the American Banker’s Association the figures are alarming and disturbing. The worst hit area is home-equity loans. If this trend continued, it has a potential to develop into a major credit crisis in near future.
How This Happened?
In my opinion availability of cheap credit and rising house prices during early part of this decade created a window for home owners to take home-equity loans. Consumers were literally treating their homes like they were liquid assets (cash in bank or ATM). They were buy consumables and services(insane). All was well until the home prices started going down and down. The market collapsed and the consumers were left in pile of debt. 
The data shows that default rates on home equity loans have climbed to more than 3.5 percent in first quarter of 2009. The late payments on credit cards is also touching 2% levels. This is a big jump compared to the figures this time last year.
One in 9 American is Jobless
The major contribution in this mess is Un-employment. According to official data, every 1 in 10 person is out of job. This is national average. there are states where every 1 in 8 people is out of job. worse thing is that is just a beginning. Job losses will keep on rising and people’s ability to pay their bills will come to a grinding halt.
Home owners will not able able to pay back home equity loans and credit cards as there will be no more regular checks to make the payment. Already in deep debt on their credit cards, they are very likely to hit the road sooner or later.
Credit Card Defaults
Normally default on credit cards is around 1%. At this moment, bankers are reporting defaults and delinquent credit card accounts to be at more than 6.6 percent of total outstanding credit card debt on bank’s balance sheets.
The Equity that is no more
The bad news does not stop there. Job losses and late payments on mortgage and home equity loans means that people are living off their credit cards. The high APR of 29% means that their equity in their homes will soon be zero and they will be facing a foreclosure or file for bankruptcy.
What this means for Economy?
For the reasons above, the state of U.S. economy is going to be really bad before things will get better. Housing prices are likely to go down further as result of these fresh bankruptcies and foreclosures.
We at FairLoanRate.com think that it is impossible to see recovery in economy in near future, Unless there is a dramatic improvement in Un-Employment Data. Only when the real buying power of US Consumers is restored, then and only then we can see a recovery in over all economic situation.
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