Credit card companies swoop on subprime borrowers

Can't make your mortgage payment? Check your snail mail for some new plastic.

Published September 5, 2007 6:31PM (EDT)

The worst housing slump in 16 years isn't getting any better. On Wednesday, the National Association of Realtors announced that its "pending sales index," an indicator that tracks the number of houses for which contracts have been signed but the transaction hasn't closed, dropped 12.2 percent month-over-month -- the biggest plunge recorded since the NAR started keeping such records in 2001.

And that was before the market turmoil and credit crunch of August. Meanwhile, analysts are revising, downward, their expectations for Friday's upcoming job data, after Wednesday's Automatic Data Processing jobs report indicated that hiring by private companies has slumped. Spending for residential construction is falling. Rumors are flying that big layoffs are coming at Countrywide, the nation's biggest mortgage lender, and there is some concern that the commercial real estate market is beginning to show signs of weakness. And continued nervousness over liquidity issues is spooking the markets.

But it's not all gloomy-doomy! If you're underwater on your subprime mortgage, you've still got friends. Naked Capitalism, by way of the Prudent Investor, points us to a terrific Boston Globe story breaking the news that even as the mortgage mess started accelerating, credit card companies began targeting subprime mortgage holders with a deluge of direct mail offers pitching new credit cards! Because if you can't refinance your way into some quick cash, then pulling out some brand-new plastic is clearly the smart way to go.

As explained by the Globe's Robert Gavin, credit card companies are quite fond of subprime mortgage holders in distress, because they're likely to make only the minimum payments on their bills, allowing the credit issuers to rack up big interest fee windfalls. Direct mail offers to borrowers with good credit, in contrast, are falling, because people who pay off their bills every month are, well, icky.

Rest assured -- these lenders won't make the same reckless mistakes as the mortgage originators.

Credit card issuers have a successful record of managing the risk of lending to subprime customers, using sophisticated computer models to determine fees, interest rates, and lines of credit, industry analysts said.

In many ways, they have had to. Unlike mortgages, which are secured, meaning lenders can take property if borrowers default, credit card loans are unsecured. A default can mean total loss.

It is a risk banks are willing to take. Recent loan officer surveys by the Federal Reserve showed that many banks eased credit card lending standards this year, even as mortgage standards tightened.

That's the best news How the World Works has heard all summer: Credit card lending standards are being relaxed, just in time for an economic slowdown. I have complete faith in "sophisticated computer models." Don't you?

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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