It isn’t surprising to see spreads on credit card debt on the increase. In fact, it might seem odd that it has taken this long.
However, one perverse effect of the 2005 bankruptcy bill is that it is easier for consumers who are not eligible for a Chapter 7 bankruptcy to walk from their mortgages, which are de facto non recourse, than from their credit card debt (yes, refis as opposed to purchase money mortgages are recourse, generally speaking, but servicers seldom pursue borrowers for any shortfall, since the cost of the exercise will almost certainly exceed the rewards). The repayment plans, if you do not qualify for Chapter 7, are, in the words of a bankruptcy lawyer, draconian.
We noted earlier that banks feel newly emboldened by the bill to try to extract more from credit card borrowers than they would have in the past. In March, we quoted a Business Week article:
Until recently issuers often agreed to ratchet down interest rates permanently, to as low as 0%, for those working with credit counselors. That has been a critical concession, says the industry, since it makes monthly payments more affordable and helps ensure the principal is getting paid down. But now some credit-card companies are balking. Discover Financial Services, (DFS) counselors contend, won’t cut rates below 17.9% for clients, while Capital One Financial (COF) is holding firm at 15.9%. At least 5 of the 13 largest issuers are offering smaller breaks on rates than they did five years ago, according to a study by the Consumer Federation of America
However, as Elizabeth Warren of Credit Slips pointed out, you can’t get blood from a turnip, and if overstressed consumers have to give priority to one debt, it merely means that a different one will not get paid:
…. family debts are tied to each other. If fewer consumers can get any relief, more counseling plans will fail. That means more bankruptcies, and, while they are at it, more consumers discharging other debts such as medical bills. More consumers will also take a second look at whether it makes sense to give back the car for which the loan far exceeds the value. This is also the time to look at the home mortgage and think about whether trying to make the payment after a reset is worthwhile. Don’t get me wrong: this won’t affect millions, but, at the margins, a credit card squeeze on interest rates will push more people to give up altogether–and that will affect returns for other lenders as well.
Yields relative to benchmark rates on securities backed by credit card debt rose to records amid concern that falling household income will curtail spending and make it harder for consumers to pay their bills.
Spreads on credit card asset-backed securities of different ratings and maturities rose by 10 basis points to 50 basis points during the week ended Aug. 28, according to JPMorgan Chase & Co. Credit card bonds rated AAA and maturing in five years rose 15 basis points from the week earlier to 150 basis points more than the benchmark swap rate, analysts led by Christopher Flanagan in New York wrote in an Aug. 29 report….
“The focus is on the weakened consumer,” Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York, said today in a telephone interview. “The consumer is severely pinched, and we are likely to see this trend in consumer ABS products continue.”….
American Express Co. paid 130 basis points more than the one-month London interbank offered rate in its last sale of AAA asset-backed debt on Aug. 8, according to data compiled by Bloomberg. The company paid 4 basis points over Libor on similar debt sold in July 2007…..
New York-based American Express had a credit-card delinquency rate of 3.42 percent as of July, Bloomberg data show. Uncollectible debt rose to 5.3 percent of loans from 2.9 percent a year earlier and will climb as the year progresses, American Express Chief Executive Officer Kenneth Chenault said on July 21.
Consumer purchases slowed to an increase of 0.2 percent in July, one-third the pace in June, the Commerce Department said Aug. 29. Incomes dropped 0.7 percent, the first decrease since August 2005.
U.S. consumers borrowed more than twice as much as economists forecast in June. Consumer credit rose by $14.3 billion, the most since November, to $2.59 trillion, according to the Federal Reserve..