Like lab rats

It is fascinating to watch the ongoing developments in how the American consumer is adjusting to the new realities of a world where easy credit no longer abounds.

In some ways they are like the lab rats in those cocaine experiments where the little fellas just keep hitting the levers to dispense more of the narcotic. Over time, the drug causes a reaction that looks almost like an instinctual or natural survival response when in fact the little guys' internal chemistry is so messed up that his little world is anything but natural.

That same sort of behavior can be seen in a growing number of American consumers these days as there appears to be little choice other than to keep hitting one of several levers to get more credit, to perpetuate an existence that is anything but natural, their internal chemistry severely impaired as well.

Last week, the American Bankers Association reported that late payments on home equity loans rose during the first quarter while delinquencies for credit cards fell. While this is not that unusual, some have postulated that, sensing an accommodating environment in mortgage lending due to the overall distress in the industry, borrowers are seeking to preserve their access to credit cards while risking their homes.

The LA Times reported on the changing face of the current delinquency rate, now at its highest level since 2001:

Ten or 15 years ago, consumers made regular mortgage payments at all costs so as not to lose their homes.

"People today, in order to keep themselves alive, they're paying off their credit cards first rather than paying off their mortgages first in order to keep an open line of credit," he said.

Many of those homeowners bought expensive properties with a "figure it out when they get there" mentality, Emerson said.

"Trouble is," he said, "they never figure it out."

Getting everyone to borrow and spend worked rather well when interest rates were low and home prices were rising - that was the recovery plan back in 2001 and 2002.

Remember how it started with zero percent financing for autos? And then mortgage rates came down and millions of home buyers chose low-rate adjustable mortgages?

Then home prices took off and people started borrowing against their home to buy all sorts of things - cars, vacations, granite countertops, more homes.

The other day, MSN reported that some of those cars are now headed back to the bank - the repo man is again busy.

As the subprime-mortgage collapse blares in the background, "recovery service agents" have been cleaning up the wreckage of another subprime-lending mess: that of the auto industry, which in its own competitive bid for buyers has been extending longer, costlier loans to people unable to keep up with their payments.

One in three auto-loan borrowers have payments greater than $500 a month, according to consumer credit agency Experian, and 12% have been late at least once.
...
Repossession agents in areas hit by foreclosures say they've been picking up vehicles both from people struggling to keep their homes and from those now left without work: construction workers, pavers, landscapers and real-estate agents.

"It is actually stunning the number of cars we're taking from people who are supporting the local real-estate market," said J. Patrick Altes, the president of Falcon International, a recovery agency with offices throughout Florida. "It's almost the type of thing where we see it and you wonder if anyone else sees it. . . . It's like they turned off the spigot."

And yesterday, as part of a continuing trend, consumer credit rose by a whopping $12.9 billion, or 6.4 percent, from April to May as reported by MarketWatch:

Credit-card debts rose at a 9.8% annual rate in May, the most in six months after a revised 0.2% gain in April. Earlier, April's credit-card debt was originally reported as a 0.5% decline.

The average interest rate on credit-card accounts rose to 13.46%, the highest in five years.

Non-revolving debts, such as auto loans, student loans, and personal loans, rose at a 4.4% pace in May after a 1.7% gain in April.

It's hard to know who to blame for what's gone on over the last few years - the rats or the scientists.