Standard & Poor's last week issued a comment on the state of the NextCard securitizations, which have been hotly watched by the market following several enforcement actions handed down by the U.S. bank regulators, ultimately leading to a seizure (and closure) of NextBank by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.
On the whole, excess spread is still at healthy levels, S&P said, with the 20.34% portfolio yield countering the rising delinquency rate and charge-off rates (7.10% and 11.56%, respectively). "If charge-offs continue to increase, or are accelerated as a result of the adverse impact on servicing caused by the NextCard situation, the excess spread could decline significantly in future months," analysts at S&P write.
However, the FDIC has put incentives in place to retain the 600 or so employees servicing the portfolio. S&P believes that the NextCard portfolio will be acquired within two months time. As was widely publicized in the industry, the FDIC halted the early amortization of the securitizations, ruling that the wind-down was unenforceable based solely on an "insolovency or appointment of the FDIC as receiver." Sources have speculated that the FDIC made this move to preserve the value of the portfolio.
NextCard ran into trouble last fall when the OCC ruled that the bank was wrongly classifying its fraud losses as such, and needed to reclassify them as credit losses. Typically, fraud losses are deducted from the seller's interest, where credit losses are deducted from the waterfall, or the buyer's interest. The OCC based its decision on the fact that NextCard's Internet business model exposed it to a higher degree of origination fraud than is usual in the credit card industry. As per the reclassification, NextCard was found to have been subsidizing its securitizations, and thus lost its low-level recourse treatment, which left it significantly undercapitalized.