Market Report: How to Profit from the Demise of Sanity
When homeowners become delinquent in housing payments, the lender can foreclose on the property. But when a credit card borrower becomes delinquent in monthly payments, one of the things the bank can do is give that borrower more credit or market credit availability to those with poor credit. That would explain why companies like Capital One (COF) have tanked from $80 to under $70 in recent months.
A recent Boston Globe article reported that “Credit card companies woo struggling mortgage-holders,” and that “as subprime borrowers began to default on their mortgages in rapidly growing numbers this year, credit card issuers increased their efforts to sign up such customers with tarnished financial histories, according to a market research firm.”
That means that credit card issuers boosted their marketing efforts to a group of people that are having a hard time paying other bills. Thinking that these same people would be able to pay off credit card debt, the companies offered more credit. These are the people that can no longer refinance or tap into home equity, and are turning to credit cards as a last alternative.
Unfortunately, the move may be a bad one for credit card issuers.
Already, in the first five months of this year, credit card delinquencies were 3.7% higher than 2006. Late payments were up by 30% over the same time. Now, consider that there’s more than $850 billion of credit debt out there, and you can see why we’re bearish on companies like Capital One.
Even more interesting, and worrisome for those long credit companies, is the fact that throughout the housing boom, home equity was used to pay off credit card debt. But nowadays, with home equity woes, people can’t do that any more. According to a USA Today article, “Since 2001, more than $350 billion in card debt has been shifted into home-equity loans or into mortgages refinanced by homeowners, says Robert Manning, a finance professor at Rochester Institute of Technology."
Other negatives for the likes of Capital One… The company may have shut the door on GreenPoint Mortgage, but the bank is still holding a $12.5 billion mortgage portfolio with plans to make new loans through its Home Loans unit and other bank branches. Plus, it’s another subprime credit card lender witnessing delinquency problems. And then there’s its exposure to the subprime auto loan business, where it’s watching as auto-lending profits dwindle.
Ian
