| Credit Card Bankruptcy? |
| By Credit Federal |
Published
10/18/2008
|
Financial News
|
|
|
|
|
Outstanding Credit Card Debt Worries Issuers
Will bad credit card debt cause credit card bankruptcy filings?
In light of the mortgage crisis which resulted in failed banks, credit card companies have their own worries to face. As credit card holders fall behind on payments and defaults rise, its understandable that they're worried about the $950 billion worth of outstanding credit card debt. And right now, there's no lifeline setup for them, because the Treasury Department's $700 billion mortgage bailout doesn't include credit card issuers.
This is particularly bad news for JPMorgan Chase and Bank of America; who have major credit card operations and had avoided; and benefited from, the mortgage crisis.
Last year to take a proactive approach, JPMorgan began reaching out to troubled borrowers, setting up payment programs and making other account adjustments.
JPMorgan spokeswoman Tanya Madison stated: "We have seen higher credit card losses. We are concerned about (it) but believe we are taking the right steps to help our customers and manage our risk."
But some banks and credit card companies may be worsening their problems. To overcome potential losses prior to federal regulation, they're increasing interest rates which is actually making it harder for cardholders to keep up with payments.
It's estimated that credit card issuers will lose $41 billion in bad debt this year and a roaring $96 billion loss next year. These losses will be added to the $365 billion market for securities backed by credit card debt. As with mortgages, banks bundle groups of so-called credit card receivables (essentially consumers' outstanding balances), and sell them to big investors such as hedge funds and pension funds. Big issuers offload roughly 70% of their credit card debt. But it's getting harder for banks to find buyers for that debt. Interest rates have been rising on credit card securities, a sign that investor appetite is waning. To help entice buyers, credit card companies are having to put up more money as collateral, a guarantee in case something goes wrong with the securities. Mortgage lenders, in sharp contrast, typically aren't asked to do this, at least not yet.
Although the credit card market is a mere fraction of the $11.9 trillion mortgage market, most credit card debt is unsecured which makes losses more potent. When cardholders default (stop paying credit card balances), there are no assets (collateral) for credit card companies to liquidate to recover losses. By comparison, there is more bad credit accounts on the books for credit card companies. High risk credit card holders with low credit scores account for roughly 30% of outstanding unsecured credit card debt, compared with 11% of secured mortgage debt.
Nearly half (over 45%) of Washington Mutual's credit card portfolio is subprime, which could become a headache for JPMorgan which is buying their troubled credit card business and other assets for $1.9 billion.
Credit card losses are already nibbling away lender profits. Bank of America, the nation's second-largest issuer behind JPMorgan, stated that roughly $3 billion of its $184 billion credit card portfolio had soured, a 50% increase from a year ago.
Even American Express; although it caters to wealthier card holders, upped its provisions for credit card losses from $810 million to $1.5 billion in the latest quarter. Hence it's not only bad credit people who are exceeding personal budgets.
What started all this credit card mess? Was it due to actions by credit card companies? Was it a lack of federal regulation? The best way to answer these questions is with a question: Should credit card companies have denied approval for bad credit people?
The lending boom; whether the fault of credit card issuers or card holders, is the root of the problem. During the boom, credit cards were issued to just about anyone and everyone, including high risk people. Perhaps if credit card companies had rejected bad credit applications, they wouldn't face the high risk defaults. Yet; on the other hand, credit card companies made it easy for card holders to get deep into debt by offering cash advances and by increasing credit limits, as well as additional cards to people who already had maxed out balances with other card companies.
The typical knee-jerk reaction by federal regulators is taking place, limiting interest rate increases, abolishing certain fees and questioning billing practices. This is much like placing a bandaid over a gunshot wound without first removing the bullet and cleansing the wound. Instead, the gun should never have been fired in the first place. Federal regulators want credit card companies to approve under-served bad credit people, yet then point fingers at credit card companies for allowing such people to charge debt they cannot repay.
Some of the proposed regulations are indeed long overdue, such as giving every card holder a 21 day grace period before being hit with a late fee, instead of the few days offered now by some companies. A similar plan working its way through Congress would allow banks to increase rates only on consumers' future purchases, not on existing balances. And under both proposals, credit card companies would have to allocate account holders' payments equally to balances with different interest rates. Currently, companies first apply payments to the debt with the lowest rate, which means it takes longer and makes it costlier for consumers to pay off their debt.
Meanwhile, to get ahead regulations, many companies are jacking up interest rates. A survey of major issuers by advocacy group Consumer Action found that 37% of companies had raised rates across the board, even for borrowers with relatively pristine credit records.
|
