Moody’s: More bad debt expected to be written off next year

While the rate of bad credit card debt and other loans being written off by lenders has slowed in recent months, it should pick up again in the next 12 months.

The financial analysis company Moody’s Investors Services says the rate at which bad debt is written off will likely skyrocket before the end of next year, the Associated Press recently reported. The firm estimated American lenders will write off a total of $744 billion worth of bad debt between 2008 and 2011, and so far they have only cleared $476 billion, about two-thirds of the predicted total in the first three years of that period. That leaves another $268 billion to be cleared by lenders between now and December 2011.

Moody’s figures showed 68 percent of residential mortgage losses have been claimed, but less than half of those for commercial real estate yet to be taken, the AP noted.

In addition, Moody’s predicts the return to the normal credit conditions seen before the recession will be “slow and uneven” during the next 18 months, the report said. If the global economy slides backwards in the remaining months of 2010, credit problems could reappear here in the U.S. as well. However, Moody’s says there is only a 30 percent chance at most that this will happen. Still, banks are being more cautious, keeping their outlooks negative as a result.

While the number of seriously delinquent loans being written off as uncollectable has decreased each of the last three quarters, rates for almost all loan categories are still at, or near, historic highs, the AP said. However, this type of loan accounted for just 3 percent of all loans in the second quarter, the lowest level observed since early 2009. Similarly, loans that are delinquent but have yet to be written off accounted for roughly 4.7 percent of the all lending as of the end of June.

Many credit card lenders have reduced their total number of charge-offs in recent months because consumers have cut into their credit card debt. Consumer credit has dropped in each of the last several months as Americans spend less on their cards and make a more concerted effort to pay into their total balances.