Orlando, Fla. - American consumers are still enjoying the golden age' of credit, which should buoy their fortunes - and that of the ABS market - in the face of uncertainty surrounding the housing market and a mixed outlook on the economy.
Despite widespread concerns about excess borrowing and debt obligations spinning out of control, several factors are at work in consumers' favor, said Mary Kane, director of consumer ABS research at Citigroup Global Markets, during an afternoon investor workshop session at Information Management Network's ABS East held here. Those factors include lower bankruptcy filings,
stable home equity levels and substantial financial holdings.
Moderated by Kishore Yalamanchili, a managing director at Blackrock, the panel was aimed at investors, and was set up to examine the impact of current ABS trends, cross-sector relative value and what to look for in new asset types, among other topics. The actual talk, however, focused on how macroeconomic trends and consumer credit issues might affect the ABS market. Most of the panelists' comments focused on issues related to the housing sector, bearing out one delegate's opinion that concerns about the housing market would continue to dominate discussions at this year's conference.
Although mortgage debt per capita has doubled in the last 10 years, incomes have kept pace with that growth. According to the Federal Reserve's Triennial Survey, the more consumers earn, the more debt they take on. Only 52% of all families below the 80% percentile carry significant amounts of debt.
Also, year-to-date, bankruptcy filings are running 27% of last year's petitions at this time, thanks to tougher eligibility requirements for potential filers and higher costs associated with the procedures.
Despite high rates of cash-out refinancing, consumers have maintained a stable level of equity in their homes. Further, Americans are not counting on their home equity values exclusively to derive their wealth. The value of their financial assets has risen more significantly than the value in their homes. Indeed, the median amount of financial assets held by 35.7% of Americans amounts to $200,700.
"This suggests that consumers have more financial assets to fall back on, [in addition to] the value in their homes," Kane said.
On that score, Daniel Nigro, the ABS portfolio manager at Dynamic Credit Partners, presented a sobering statistic: interest payments, as a percentage of wages and salaries, are rising. Further, they are at almost the same levels they were just before the real estate meltdown of the late 1980s and early 1990s.
New mortgage products created since those dark times have mitigated those concerns, and might make some of those concerns obsolete, Nigro said. Specifically, the ABS industry has seen the advent of such products as interest-only mortgages, longer interest-only periods and 40-year amortization mortgages.
The ABS market could adapt to changing economic landscapes, "as long as there is credit out there" and capital market credit to support it, Nigro said.
One fear that haunts investors is how the credit card market will respond to the economic landscape.
"Everyone's fear in the credit card market is that when things start to slide, they will see a decline in the credit card market before anything else," Kane said. That is a reasonable concern, she added, given the way that consumers prioritize paying their bills. They tend to make mortgage payments first, followed by auto loans and bills for such ancillary services as cable television.
Some market professionals fear that if unemployment rises, credit card payment rates will be the first to be affected, Kane said.
Despite concerns of a slowdown in home price appreciation, several factors should keep the residential market from making a hard landing, said Nigro.
For starters, home prices have appreciated by 40% in the last three years, and 25% in the last two years. Some market analysts are concerned that coastal areas that saw rapid increases might also see hard landings. However, said Nigro, high barriers to entry in markets such as California, might keep significant price depreciations in check. Americans are in a good position, despite a recent GDP growth of only 2%.
"We do a lot of work in Europe, and they would love to have 2% GDP growth," said Nigro.
Panelists, like much of the ABS and broader financial markets, took heart in surprisingly positive employment statistics released on Friday. This was good news for the housing market, because it has been historically supported by employment levels and income, Nigro said.
"Wall Street is saying that the Fed has achieved a soft landing," Kane said.
All of the positive news did not exclude certain asset classes - particularly credit cards and student loans - from challenges going ahead, Kane said.
Among student loans, college students and their parents are taking on record levels of debt to pay for the costs of higher education. The credit card sector should also see a lot of consolidation in the business, aside from the brief downturn in bankruptcy filings.
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