Unemployment triggers more delinquencies
Posted on March 29, 2008
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Delinquencies on credit card asset-backed securities have been on the rise over the past year or so. A rise in the unemployment rate could trigger even more missed payments.
“Pool performance has deteriorated significantly over the course of the last eight months,” said CreditSights, an independent research firm, in a report that studied the performance of underlying collateral in U.S. credit card ABS.
“If card delinquencies continue to rise more rapidly than one would expect from the historical relationship between unemployment and delinquencies, we may still have to wonder about credit card ABS proving to be yet another shoe to drop in the financial markets.”
It should be pointed out that up to this point, the rate of deliquencies has remained well within the normal historical range. What’s more, credit card-based securitization deals generally offer a few more basis points to make up for charge-offs on credit card accounts with problems.
Still, concerns over falling consumer confidence and possible rising unemployment could fuel a jump in delinquencies. Many consumers are already struggling to pay their mortgages. Many analysts have said that an erosion in consumers’ ability to service their credit card debts would seem to be the next logical progression in the deterioration in overall consumer debt.
CreditSights noted that U.S. banks sit on $1.1 trillion in total loans to consumers and that there is $2.5 trillion in U.S. consumer credit outstanding, “bigger than the entire stock of U.S. investment-grade corporate bonds, as well as the entire stock of non-agency residential mortgage-backed securities outstanding,” it added. “A dramatic erosion in consumer credit performance, then, could have a similarly dramatic impact on U.S. financial markets this year.”
by Marine Cole
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