Mortgage Problems Benefiting Credit Card Industry
Recent stock market turbulence and doomsday headlines have brought sudden attention to the troubles in the mortgage industry. This is an important topic since the mortgage industry affects so many areas of our economy. Consumers are wondering if the credit problems might extend to credit card companies and if the issues will affect them.
The problems in the mortgage industry may be a small boost for credit cards said Bill Hardekopf, CEO of LowCards.com. "We have actually seen an increase in credit card applications. Since the credit is drying up with second mortgages and refinancing, this increase may be tied to some of the people with troubled mortgages trying to get credit elsewhere."
Figures released on Tuesday by the Federal Reserve tend to support the increase in credit card applications that Hardekopf has been seeing. Consumer credit rose at an annual rate of 6.5 percent in June according to the Federal Reserve report. Consumer credit had risen by an even larger 7.9 percent in May. The increase included an 8.4
percent rate of increase for revolving credit which includes credit card debt. The category of total consumer credit rose $13.2 billion in June to a record $2.459 trillion, which was double what economists had been expecting.
Since the consumer credit figure does not include mortgage debt, Hardekopf says it probably is showing consumers moving money from a troubled housing market and problem mortgages to credit cards. "When we had a rising housing market, consumers were using home equity loans to finance purchases. However, with the current problems
in the sub-prime mortgage market, consumers are shifting that debt back to credit cards."
Jerry Oldshue, a board certified creditor's rights lawyer with Rosen Harwood, PA in Tuscaloosa, Alabama, described the differences between the problem mortgages and credit cards. "They have different risks associated with them. Most of the problem mortgages are sub-prime to begin with, meaning they have higher risks. They are then bundled into a portfolio and sold to a group of investors who might not have a firm grasp on how risky those mortgages are. That has been the big problem. As these teaser rates for one and three-year ARM's have been adjusting, the borrowers have been defaulting and the investors in those mortgages have been getting burned. As the investors have stopped buying those sub-prime mortgages, the mortgage companies have been left holding the bag because they could not sell the mortgages to investors and that has been driving them in to bankruptcy. Credit card companies just don't have those problems associated with issuing credit cards. They have a better handle on the risk associated with the applicant."
Hardekopf says credit card companies typically have limited exposure to the mortgage mess. "The credit card companies assess their own risk when they approve an applicant. They also hold the loan in house so they are not reliant on credit markets. That is what makes them so different from the troubled mortgages. Unfortunately, the investors getting into the mortgage business did not understand the risks levels involved and they were relying on somebody else to do
that screening process."
Even though the credit card companies are not directly affected, they are closely watching the mortgage situation. "The credit card companies notice the problems. In July, American Express announced that it was putting almost a billion dollars aside, in case their credit card customers started missing payments. So they do expect some
problems from people not being able to pay their credit card bill because they are having trouble with their mortgages," says Hardekopf. "I expect that the industry may tighten their approval standards, but I doubt they will raise rates. They are almost overly sensitive to risk. They are currently being reviewed by Congress because of their almost punitive treatment of those who are rated as risky. If they see a problem now with a current credit card holder, they already have the ability to
raise the rates or impose fees. They can even raise rates or fees if they see you having a problem in some other area, like with a mortgage payment."
The problems in the mortgage industry may be a small boost for credit cards said Bill Hardekopf, CEO of LowCards.com. "We have actually seen an increase in credit card applications. Since the credit is drying up with second mortgages and refinancing, this increase may be tied to some of the people with troubled mortgages trying to get credit elsewhere."
Figures released on Tuesday by the Federal Reserve tend to support the increase in credit card applications that Hardekopf has been seeing. Consumer credit rose at an annual rate of 6.5 percent in June according to the Federal Reserve report. Consumer credit had risen by an even larger 7.9 percent in May. The increase included an 8.4
percent rate of increase for revolving credit which includes credit card debt. The category of total consumer credit rose $13.2 billion in June to a record $2.459 trillion, which was double what economists had been expecting.
Since the consumer credit figure does not include mortgage debt, Hardekopf says it probably is showing consumers moving money from a troubled housing market and problem mortgages to credit cards. "When we had a rising housing market, consumers were using home equity loans to finance purchases. However, with the current problems
in the sub-prime mortgage market, consumers are shifting that debt back to credit cards."
Jerry Oldshue, a board certified creditor's rights lawyer with Rosen Harwood, PA in Tuscaloosa, Alabama, described the differences between the problem mortgages and credit cards. "They have different risks associated with them. Most of the problem mortgages are sub-prime to begin with, meaning they have higher risks. They are then bundled into a portfolio and sold to a group of investors who might not have a firm grasp on how risky those mortgages are. That has been the big problem. As these teaser rates for one and three-year ARM's have been adjusting, the borrowers have been defaulting and the investors in those mortgages have been getting burned. As the investors have stopped buying those sub-prime mortgages, the mortgage companies have been left holding the bag because they could not sell the mortgages to investors and that has been driving them in to bankruptcy. Credit card companies just don't have those problems associated with issuing credit cards. They have a better handle on the risk associated with the applicant."
Hardekopf says credit card companies typically have limited exposure to the mortgage mess. "The credit card companies assess their own risk when they approve an applicant. They also hold the loan in house so they are not reliant on credit markets. That is what makes them so different from the troubled mortgages. Unfortunately, the investors getting into the mortgage business did not understand the risks levels involved and they were relying on somebody else to do
that screening process."
Even though the credit card companies are not directly affected, they are closely watching the mortgage situation. "The credit card companies notice the problems. In July, American Express announced that it was putting almost a billion dollars aside, in case their credit card customers started missing payments. So they do expect some
problems from people not being able to pay their credit card bill because they are having trouble with their mortgages," says Hardekopf. "I expect that the industry may tighten their approval standards, but I doubt they will raise rates. They are almost overly sensitive to risk. They are currently being reviewed by Congress because of their almost punitive treatment of those who are rated as risky. If they see a problem now with a current credit card holder, they already have the ability to
raise the rates or impose fees. They can even raise rates or fees if they see you having a problem in some other area, like with a mortgage payment."
Links to this post:
Create a Link
<< Home