More consumers got behind on their credit card bills during the recent home mortgage refinancing boom than during the two preceding periods of heavy refinancing activity, according to a recent analysis by New York-based investment firm Keefe, Bruyette and Woods Inc.
Using credit card portfolio performance statistics from Citigroup Inc., the world's largest card issuer, as a proxy for the entire card market, KBW's fourth-quarter Asset Sales Review said 60-day-plus credit card delinquencies fell during the refinancing spikes of July 1992 to November 1993 and January 1998 to May 1999 by 15% and 33%, respectively.
"Homeowners were cleaning up their credit and paying off their higher-cost debt," the report says. In contrast, late-stage card delinquencies actually increased by 11% during the refi boom of January 2001 to March 2003, according to KBW.
"The evidence suggests that this time homeowners tapped into their home equity to maintain a lifestyle rather than to get themselves on sounder financial footing," the report says.
Noting recent, record consumer bankruptcy levels, report author Mike MacDonald, managing director of KBW's loan portfolio sales desk, surmises that "there is a change in the way people view their debt obligations." While acknowledging that some borrowers have had trouble repaying loans since "time immemorial," a newer attitude of trying to avoid debt obligations seems to be taking hold, according to MacDonald.
Keith Leggett, senior economist for the Washington, D.C.-based American Bankers Association, agrees that more people are tapping their home equity as a source of cash, and some of that cash is being used for vacations and other lifestyle-related spending. Citing a 2002 Federal Reserve study, Leggett says some 10% of American households had refinanced their mortgages over the preceding year. Of those who did "cash-outs" to tap their equity for other spending, the average amount accessed was $27,000.
But Leggett says weak job growth accounts for much of the recent rise in delinquencies. As a percentage of bank card accounts, delinquencies set a record in 2003's third quarter.
Authoritative analysis and perspective for every segment of the payments industry
Authoritative analysis and perspective for every segment of the industry
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