Credit For Everyone! Short Memory Files

From the "Have We Learned Nothing Files" comes this report:

(Dow Jones) Faced with an erosion in profits stemming from shrinking loan books, and new expansive rules curbing income on credit and debit cards, lenders are exploring ways to lend to a growing breed of borrowers with blemished credit.

A study by Deloitte Center for Financial Servicespublished earlier this month on first-time defaulters found 11% of 5,142 retail banking customers suffered for the first time a significant financial setback in the last two years, jeopardizing their access to credit from banks.

The size of this segment represents "a once-in-a-lifetime opportunity" for lenders, said Deron Weston, a principal at the U.S. banking and securities division at Deloitte Consulting LLP and an author of the report.

Not only are the numbers for these first-time credit offenders too large for lenders to ignore, but a portion still wield the financial heft to take on credit. For U.S. consumers shut off from credit, a new openness by lenders to first-time defaulters may open up funding and a means to rebuild their fractured credit. Finding ways to lend to those with blemished credit is also crucial to the U.S. economy, with the hope that a pick-up in consumer spending will spark job growth.

One subgroup in particular warrants attention: A large segment of borrowers, known as "strategic defaulters," are walking away from underwater mortgages, even though they have jobs, can afford the debt payments and are current on other loans. Strategic defaults totaled 19% of all mortgage delinquencies in the second quarter of 2009, according to data from Experian-Oliver Wyman.

Credit-card lenders are differentiating between strategic defaulters and "other borrowers who may be in trouble across all of their loans," said Cristian deRitis, a director at Moody's Analytics, an economics and credit consulting firm. "They are continuing to lend, at higher rates of course, to those first-time defaulters with otherwise good credit."

 Securitization to follow.  Then, default increase followed by charge offs followed by investor lawsuits.  And investors:  they'll gobble 'em up.