Moving Down Market
November 1, 2013
Banks have been slow to make credit cards available again to subprime borrowers. Unlike, say, auto lending, where underwriting standards have relaxed noticeably, banks haven’t loosened up much on credit cards since the financial crisis. That’s starting to change, although only for borrowers with FICOs in the 620-700 range, not exactly deep subprime. As Nora Colomer explains in our cover story, banks are finding that offering cards to borrowers with less-than-pristine credit is one of the few ways to grow receivables. That’s because the strongest borrowers continue to pay down their debt, and when they take out new accounts, to use them like debit cards, paying off the balance each month. Weaker borrowers aren’t running up big balances either, but they’re an underserved market.
The new subprime credit card accounts are unlikely to show up in securitization trusts any time soon, since banks are still relying heavily on deposit funding instead. But it’s something that bears watching: if these borrowers come under financial stress, they could always draw down on the unused portion of their credit lines.
A second story Nora wrote, about the rise of so-called peer-to-peer lending, offers another explanation for the decline in credit card outstandings: P2P lending evolved to replace home equity and borrowers often use these loans to refinance higher cost credit card debt. But the word “peer’ is used pretty loosely these days. Institutional investors are now funding these small loans, and they see securitization as a way to leverage returns.
Consumer deleveraging and easing underwriting standards were big topics at Information Management Network’s ABS East conference, as Felipe Ossa reports. Many attendees feel that American consumers are in a good position to take on more debt — potentially fueling securitization — though whether banks are willing to lend remains an open question. The strength of the housing market recovery and the potential for new asset classes, such as solar energy and rental housing, were also much discussed.
Fannie Mae’s Connecticut Avenue Securities, which debuted in October, falls into both categories. It is designed to offload the credit risk in mortgages insured by the GSE. Obtaining a credit rating for the deal paid off, as the bonds priced attracted more investors and priced at narrower spreads than a similar deal Freddie Mac issued in July.