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Trouble Ahead for Credit Card Firms?

By Neil Shah,

Posted: 2007-08-29 10:27:14

NEW YORK (Aug. 28) - U.S. credit card companies may have sidestepped the problems plaguing the mortgage industry so far, but they're likely to face higher losses if the economy dips into a recession this year.

Americans are still mostly paying off their credit cards, despite being hit by falling housing prices and tighter mortgage lending conditions, but analysts say they could default on card payments in greater numbers if U.S. labor markets weaken.

Higher default rate by credit card borrowers could undermine the value of more exotic debt products backed by credit-card securities, and further pressure the embattled U.S. asset-backed securities market, possibly raising borrowing costs for companies that depend on it.

"I've been looking at this stuff for the better part of a year, and I haven't seen the spillover," said Mike Kagawa, portfolio manager at Payden & Rygel in Los Angeles. "We've got a 4.6 percent unemployment rate."

But the situation could be very different, Kagawa says, if unemployment hits, say, 6.0 percent.

That's looking more possible these days with high-profile players like Countrywide Financial Corp. chief executive, Angelo Mozilo, forecasting a recession caused by the U.S. housing downturn.

One potential sign of trouble is U.S. government bond prices, which often move well ahead of data on jobs. The bond market is very sensitive to employment data because of its critical role in wage inflation and the overall shape of the economy.

The yield on the 10-year Treasury bond was roughly 70 basis points below the Federal Reserve's target for the overnight lending rate on Tuesday.

If this gap widens to 100 basis points, it may portend that economic activity and employment are getting worse.

"I'd be surprised if there were outsized issues in credit cards," said Adam Compton, global co-head of financial stocks research at RCM Global Investors in San Francisco, which invests about $150 billion.

"Now if the economy slows down enough to bring about much higher unemployment, you'll get higher credit card losses, no doubt about it," he said. "But it won't be the kinds of losses you saw in mortgages, where underwriting was weakened," he said.

Credit card companies are now being forced to write off around 4.6 percent of payments, compared to a low of 3.5 percent in early 2006, and 7.5 percent in the middle of 2003, during the last recession, JPMorgan data shows.

Bankruptcies and credit card balance write offs by issuers have increased modestly in recent months, but several sources said charge-offs are simply returning to normal after an artificially low period following a change in U.S. bankruptcy law.

"The increase in losses (in securities backed by credit card payments) year over year in 2007 versus 2006 is more a result of technical factors in the credit card market than a contagion effect" from housing, said Jay Eisbruck, managing director at Moody's Investors Service in New York.

Losses in credit-card securities are "still low by historical standards" of around 5.5 to 5.6 percent, Eisbruck said.

The bankruptcy law that took effect in October of 2005, which was championed by the credit card industry as a way to curb abuse, boosted filing requirements and made it tougher for many individuals to have debts excused.

As a result, Americans rushed to declare bankruptcy under the old rules, which had the effect of reducing the number of bankruptcies in 2006.

In the first quarter of 2007, there were 187,361 non-business bankruptcy filings, up 66 percent from a year earlier, according to the Administrative Office of the U.S. Courts.

Bankruptcies may simply be rising back to normal levels after being so low in 2006, but it's also the case that a weak housing market is hurting some card borrowers.

"Bankruptcy filings are creeping up because over-leveraged borrowers are feeling the impact of rising interest rates on their monthly payments," said Standard & Poor's analyst Bonnie Lee Tillen in an August 6 report.

Still, Standard & Poor's and Moody's Investors Service both don't see any significant contagion from the housing market creeping into the credit card sector, and believe that a recession is still unlikely at this point.

"We're still expecting losses to increase and then settle in the 5 percent to 6 percent range," S&P's Lee Tillen said. "Collateral performance still remains at or near historical bests in most cases."

Additional reporting by Dan Wilchins, Jonathan Stempel and John Parry in New York.

2007-08-28 17:40:45

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174 comments

kunzsp 03:16:38 PM Aug 30 2007

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UnAmerican Expressing is trying to ripp me off again.

Sympahty for the devil, but no sympathy for the credit card companies:o) PK

kunzsp 10:08:51 AM Aug 30 2007

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It seems to me they want you to mess up, more money in their pockets. I am having problems with American Express, which infuriates me. PK

toughtimesouch 09:36:51 AM Aug 30 2007

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Oh yeah troubles are ahead for credit card companies. They jacked up the prices on people with good credit. Now these people are calling bankruptcy lawyers. The credit card companies made an ignorant financial decision. Afterall 13% interest rate of a balance being paid is better than 30% interest rate of nothing. Sometimes greed does turn around and bite you in the butt. Doubt the credit card companies will get any sympathy. They'll probably still send out massive applications to everyone.

economyuhoh 08:24:14 AM Aug 30 2007

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Who will get rich off of this economy: Credit card counselors, lawyers, foreclosure and bankruptcy courts. Who will lose in this economy: Credit card co.'s, mortgage co.'s, banks, homeowners, credit card holders, developers, construction co.'s, tiltle co.'s, realtors, mortgage underwriters, building supply co.'s furniture co.'s, appliance co.'s, etc As these co.'s go under what will happen? All the employees will be laid off. What's that mean? Less consumer spending, more foreclosures, more bankruptcies. Consumer spending makes up 2/3 of our GDP. So who will be the BIGGEST LOSER? Our ECONOMY. As the economy falls from little spending the layoffs spread to all spending sectors, then there will me more foreclosures and bankruptcies. Vicious cycle.

economyuhoh 07:55:50 AM Aug 30 2007

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They changed the credit card rules when they changed the bankruptcy rules(2005). Credit card co.'s can now look at your credit anytime. Even if you pay your bills, aren't late and don't go over your limit, they can raise your interest based on your debt/income ratio. So if you have a large mortgage and credit cards with balances they can raise you rate, not jut a little but actually double the rate which often almost doubles your minimum payment. So now people with their heads barely above water have now just been pushed under. Also, a lot of people with good credit are now steaming mad at this unjust practice. What's the result of this greed? Fed up people sayin **** you and defaulting or going bankrupt. The only people going to get rich now are the lawyers.

dcoll85193 01:20:02 AM Aug 30 2007

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Come on NOW! 39.95% default rates? The Government can push there No Child Left Behind! But they have nothing to say about the practice of legal corporate loan sharking! The credit card industry is behind every major economic problems we have in our country since 1975. They give collage kids credit cards every day, with spending limits that are just plain STUPID! Some of theses so-called credit card Companies, dont even ask you for a SSI number, if your in this country illegally! So, just be one HOUR late. Thats right, they use hours now. If your payment isnt recieved by 5:00 PM, your late. Forget about post marks. They have no time for that anymore. While your payment is sitting in a PO Box in Florida, when you live in New York. This is the cunsumers problem. Why cant I send my payment to a REAL ADDRESS? Like mine, the one who owes them the money? Instead, you get a PO Box and ALL of them have them. Wake Up America and smell what the Corporate is dealing you...

PROMO U 12:46:29 AM Aug 30 2007

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If you're going to use a credit card, use it and pay it as it comes in. If you cant handle that OR have no control, then DON"T USE THEM. You are your worse enemy. No one else's fault but your own if you fall behind. As for some people that all they ever do is complain because some people have money and they don't, well, get over it. It is YOUR choice to better yourself or NOT. Don't tell me it cant be done, because I am living proof that it can be and so are my parents that came from Cuba years ago and we NEVER got a dime from welfare. My parents worked 2 jobs each and I even helped cleaning at nite with them as a kid. They were determined to make it and it taught me to do the same. God has truly blessed us for working hard and not holding our hands out begging for everything to be given to us like most Democrats/socialists want.

biggarou1 11:24:15 PM Aug 29 2007

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I don't live beyond my means and don't try to so I take all the money I would fork over to credit card companies and throw it into an ING account. That way I get mad intrest money back while giving the fat cats running that show the double fisted middle finger

cesarfusa 10:57:41 PM Aug 29 2007

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you are right!! we all shouldn't buy anything made in china, they are one of the main reasons for recession

GusandPoppysKid 10:50:02 PM Aug 29 2007

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Does it really surprise all of you that the economic leadership of this country is nothing but a bunch of bloodsucking leeches? Man, shut this greedy mess down! If you don't absolutely have to have it to survive, leave the damn Chinese made piece of crap on the shelf! Like some of you are saying, shut the door in their face and they will crawl after you kissing your butt to come back! SHUT THEM DOWN!!!!

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174 comments