With Defaults Rising, Is a Credit-Card Crisis Looming? – TIME
Increased use of securitization in the credit-card industry has fueled some if its growth. Over the past four years, seven of the biggest card issuers packaged more debt into securities, which they sold to investors, according to USA Today's assessment of banking records. But with credit-card defaults rising and a general "flight to quality" this year brought on by the subprime mortgage crisis, fewer outlets are willing to buy the debt. "The securitization market for credit cards was operating for the first half of 2008 but is now shut down, making it harder to securitize credit-card debt," says Arthur Wilmarth, finance professor at George Washington University Law School. Banks, forced to keep more debt on their books, are less willing to lend to anyone who doesn't have a high FICA, or credit quality, score. The result is a vicious cycle of borrowers being hit with higher interest rates, hair-trigger late fees and curtailed credit lines just when they need funds the most. Higher food and gas prices have contributed to that burden.
Still, not everyone agrees that the situation is on the brink of despair. "The credit-card industry is being likened to what has happened in the mortgage industry," says Greg McBride, senior financial analyst at Bankrate.com, a personal-finance website. "I don't see how the two should be mentioned in the same sentence." He reasons that even if credit-card defaults reach a record high of 10% of the $970 billion in revolving debt, a chunk of that total will get paid off in full every month, which would result in an aggregate default of less than $100 billion. That number doesn't come near the losses that have occurred in the $14 trillion U.S. mortgage market. Moreover, credit card asset-backed securities aren't as far-reaching or as complex as mortgage asset-backed securities, and they don't have large amounts of credit-default swaps piled on top of them like mortgages do. As a result, a total collapse of the credit-card industry wouldn't have the same far-reaching ramifications.
"I don't think the credit-card industry will implode," says Ronald Mann of Columbia Law. Issuers have been taking steps to mitigate risks like scaling back credit lines and closing out accounts for cardholders exhibiting distress. "Sure, they're likely to have a bad year," he says, "but lots of people will in 2009."
Posted on November 25, 2008, in Bank Stocks, Financial Markets, India, Meltdown, US and tagged ABS, Analytics, Bank Stocks, Credit Crisis, Defaults, Financial Markets, Meltdown, Securitization. Bookmark the permalink. Leave a comment.