Banks are increasingly issuing credit cards to consumers with riskier credit profiles, at a time when consumers in financial distress are placing increased value on paying their mortgages ahead of their credit cards, according to two studies published last week.
Moody’s Investors Service said that lending to borrowers with a riskier credit profile may lay the groundwork for a deterioration of performance in credit card securitizations, if the US economy falls into a recession again.
For now deal performance is likely to continue improving as the U.S. economy improves.
However, the risks of lending to less creditworthy consumers are sure to pack a punch if the economy takes a turn for the worse. That is because “of the unused portion of credit lines on which lower-credit-quality cardholders can draw down if they come under financial stress.
Another trend that has developed in consumer behavior indicates that consumers in financial distress are willing to walk away from credit card debt before mortgage debt, a reversal of the trend observed during the housing crisis, according to a new TransUnion study.
"The results of previous TransUnion research showed that, beginning in 2008, consumers with both a credit card and a mortgage had a higher propensity to go delinquent on their mortgages than on their credit cards -- a reversal of traditional payment patterns," said Steve Chaouki, co-author of the study and group vice president in TransUnion's financial services business unit. "This occurred in an economic environment marked by the build-up and bursting of the housing bubble. In fact, it is broadly believed that the shift in payment preferences was largely derived from the struggles of the housing market.
“Our latest study indicates that, for the first time since the housing bubble, consumers with constrained liquidity are making their mortgage payments about as much as their credit card payments, though auto loan payments remain the top priority."
The study investigates payment behavior in periods of significant home price depreciation and periods of significant appreciation, and used a sample window that spanned from January 2008 to December 2012.
Chaouki said that if housing prices continued to increase, it's likely that by the end of 2013 “the majority of consumers” will opt “to pay their mortgages ahead of their credit cards."
Credit cards are being underwritten to riskier consumers at a time that the consumer has shown that is more willing to walk away from unsecured credit card debt.
According to the Moody’s report the amount of “available credit” – the difference between cardholders approved credit lines and their current balances, has widened for weaker credit quality cardholders from pre-crisis levels because up to now consumers have been reluctant to build up card balances.
But eventually, as the economy improves, Moody’s said it expected these weaker credit quality borrowers to leverage up, again.
