After several weeks of reaping retribution for its scorching and somewhat precarious rise, subprime mortgage performance continues to inspire worries of spillover effects into other ABS sectors. While it is too early to definitely say whether subprime mortgage performance will affect the auto ABS (see story p.7) sector, market participants say, they point to a set of perfected practices that so far make credit card ABS deals immune to the recent volatility in mortgages.
Unlike the mortgage industry, which expanded rapidly on the strength of an array of affordable products, few credit card issuers have aggressively chased subprime business in the last several years. That is partly because bank regulators forced card issuers to shift their focus to highly rated customers by making it difficult for banks to pursue subprime business, according to Mary Kane, Citigroup Global Market's director of ABS strategy and analysis. Taking the hint from regulators, and going one step further, Capital One reduced its subprime exposure to 30% of its portfolio, from about 40%.
Furthermore, credit card issuers have a more conservative definition of subprime, putting borrowers with FICO scores of 660 or less into that category. On the secondary market, major credit card issuers end up restricting subprime receivables to between 16% and 20%, Kane says. Some mortgage lenders consider borrowers with a 660 score as being prime customers.
That credit card ABS debt should outperform any mortgage sector is amazing, especially if one recounts the usual hierarchy of debt repayment: mortgages, auto loans and credit cards. Kane suggests that that standard is changing, as consumers increasingly rely on credit cards to cover everyday purchases, and endeavor to keep their card accounts current as their mortgage situations become more worrisome. There are worse fates than ultimately moving from the standard balance-due priority to a holy trinity of debt, wherein consumers pay equal heed to mortgage, auto and credit card debt.
The word "contagion" evokes images of something alien that introduces a putrid, all-consuming infection. There was no outside influence in the recent subprime MBS crisis. When it recovers, its dealmakers should study the credit card ABS sector's best moves and come up with a business approach that is profitable, as well as less prone to severe upsets. The entire MBS sector should become as resilient as credit card ABS. We are talking about something sacred - roofs over people's heads.
For now, the mortgage sector, which usually comprises the bulk of ABS issuance, is bit by bit poking its head out from hiding. Total issuance was estimated to fall between $12 billion and $15 billion last week, according to market participants.
"Everything is much better than it was ... two weeks ago," said one trader.
Indeed, despite a relatively quiet pricing atmosphere, completed HEL deals saw slight tightening on triple-A rated spreads, and the eponymous Citigroup Mortgage Loan Trust benefited from that. Its one-year triple-A tranche priced at 11 basis points over the one-month Libor.
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