More Subprime Side Effects?
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.