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More Subprime Side Effects?

posted by Angie Littwin

When credit card borrowers have trouble paying their debts, issuers respond in a number of ways, but one of them is particularly surprising:  they often extend more credit.  According to the Boston Globe article Credit Card Companies Woo Struggling Mortgage-holders, issuers are extending this strategy to subprime homeowners as well.  Globe staffer Robert Gavin reports on a study by Mintel International Group, which claims that as the subprime mortgage market continues to implode, credit card issuers are stepping in to offer more credit to struggling homeowners. 

Or at least that’s what the headline says. 

The reality seems to be a bit more subtle.  I couldn’t obtain a copy of the study itself, so my understanding of it is based entirely on the Globe report.  But even a close reading of the article indicates that the tie is not as clear as the headline makes it sound.  The study appears to have found a strong correlation between the decline in the subprime housing market and an increase in credit card solicitations to subprime borrowers generally.  Direct-mail solicitations to subprime borrowers were 41 percent higher in the first six months of 2007 than they were in the first half of 2006.  At the same time, solicitations to the most credit-worthy consumers fell by 13 percent. And the numbers are even starker when you look at June of 2005. 

This is indeed fascinating.  But it’s not conclusive.  These results appear to apply to all subprime borrowers.  What the study did not seem to find is that borrowers struggling with subprime mortgages were singled out.  As it stands, there’s another event that could explain these findings equally well – the U.S. bankruptcy law that went into effect in October of 2005.  It could be the case that issuers are still adjusting their solicitation volume to account for the newly weakened bankruptcy protections available to their defaulting customers.  On the other hand, issuers may very well also be hoping to cash in on the subprime mortgage crisis by providing cash for those who can no longer draw on their home equity or by encouraging struggling homeowners to use credit card debt to bridge the gap in their mortgage payments. Only a study specifically focused on subprime homeowners will tell.

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Comments

How interesting! Worth a study, to be sure.

I have no data, of course, but based on the little window on the universe I have here, it seems likely that the solicitations are designed to appeal to those whose cash flow is under severe strain as they struggle to cover increased mortgage payments when ARM's readjust, on the theory that such folks are highly motivated to use the card immediately. When one recalls that the credit card industry makes more money off payers who are late, or are in distress, it makes sense that they are happy to take on the "risk of default" in exchange for the "reward of high payment streams." Few credit card issuers issue their cards with the anticipation or expectation that the balance will ever actually repaid -- they are selling cash flow streams upstream, so its all about the cash flow. And BAPCPA only aided that business decision, because it tended to discourage or at least put off the borrower's decision to file for bankruptcy, further expanding the "window" of distress that generates the high revenue streams that card issuers covet (I'm borrowing here from what I know of Ronald Mann's work).

So the solicitations look like they make very good economic sense to me. Of course, empirical data would be a huge boon.

I would be very interested in the study if you find it.

The real story is that the cc companies were used to bridge Early Payment Default (EPD) clauses for loan repurchases.

When the real estate market was appreciating fast enough the borrower could easily get a longer rope via appreciation.

Once appreciation stopped cc took borrowers out 3-6 months and thus lender's contractual obligation to repurchase became a tort for claims of fraud.

The most ridiculous thing is that this bunk debt has bounced around in our financial markets for years before the recent bail outs. TAF, TSLF, stimulus package (Fannie/Freddie/FHA loan increases not $600) pending foreclosure/mortgage aid, etc. Now all the toxic waste or what can't be hidden will be transferred to our treasury and inflation. Yippee!

Unfortunately, I don't believe our world creditors will allow this to continue for much longer.

C'mon WAMU buys PVN, BofA buys MBNA, Wachovia should have been smart enough to avoid World Savings/GDW. Now all the banks are on the brink of insolvency and "too big" to fail. I don't believe this theory should apply to white collar criminals!

This entire financial crisis wreaks of scienter.

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