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Credit card companies woo struggling mortgage-holders

Email|Print|Single Page| Text size + By Robert Gavin
Globe Staff / September 4, 2007

As subprime borrowers began to default on their mortgages in rapidly growing numbers this year, credit card issuers increased their efforts to sign up such customers with tarnished financial histories, according to a market research firm.

Direct mail credit card offers to subprime customers in the United States jumped 41 percent in the first half of this year, compared with the first half in 2006, according to Mintel International Group. Direct mail offers targeted at customers with the best credit fell more than 13 percent.

Yet, during this same period, defaults on subprime mortgages, which charge higher interest rates because the borrowers' blemished credit makes them bigger risks, rose significantly. In June, nearly 1 in 5 subprime mortgages were at least 60 days past due, and more than 1 in 20 were in foreclo sure, according to First American LoanPerformance, a San Francisco firm that collects and analyzes mortgage data.

Though it seems counterintuitive to extend credit to households already struggling with debt, the meltdown in housing and mortgage markets probably led credit card issuers to boost their marketing to subprime customers, said Julie Lizer, Mintel's manager of custom research.

As home values decline and lenders balk at writing subprime mortgages, these customers can no longer refinance and tap into home equity for cash. That leaves credit cards as their only option, said Lizer.

The increase in direct mail to subprime customers tracks the slide in the housing market. In June, mail offers to these households were nearly double those of June 2005, near the peak of the US housing market, she said. Mintel estimates mail volumes based on surveys of representative US households.

"The companies are seeing a market need, and filling it by increasing mail to these consumers," said Lizer.

But consumer advocates worry that targeting subprime customers may worsen their problems.

"This causes us great concern that some major credit card issuers are marketing to people who are in a risky financial position," said Travis Plunkett, legislative director of the Consumer Federation of America. "It's another sign that some credit card issuers are engaging in risky, irresponsible lending to vulnerable consumers."

Plunkett, in Congressional testimony earlier this year, cited research that showed fees charged to subprime borrowers making late card payments can exceed their interest payments. Borrowers are classified as subprime if they have past credit problems, such as late or missing payments.

The subprime mortgage meltdown has sent ripple effects throughout the economy. In recent months, several mortgage companies specializing in subprime loans, including New Century Financial Corp., the nation's second-largest subprime mortgage lender, filed for bankruptcy.

The problem then spread to financial markets, wiping out hedge funds that invested heavily in subprime mortgages, and forcing the Federal Reserve and central banks of other nations to pump more than $100 billion into the global banking system to avert a credit crisis. Many financial analysts believe the Fed may soon cut a key interest rate to stabilize the economy.

But card issuers say the flurry of marketing to subprime borrowers is a sign of healthy competition. Keith Leggett, senior economist at the American Bankers Association, said direct mail offers are typically aimed at luring customers who have credit cards away from competitors. This means better rates and terms for borrowers.

"Consumers should be grateful that we have a very competitive market," he said.

For credit card companies, the subprime market is a profitable one, analysts and consumer advocates say. Subprime customers, charged higher rates than those with better credit, are more likely to make minimum payments, maintaining balances that generate interest revenue for card issuers, consumer advocates said.

HSBC Holdings PLC of London leads the direct mail surge, according to Mintel. Its mail offers to subprime households in the first six months of the year more than doubled from 2006. A spokeswoman said, "HSBC's card and retail services business is a full spectrum credit lender, providing credit cards to prime, near-prime, and subprime customers. We don't ever comment, however, on our proprietary marketing information."

Capital One Financial Corp.'s subprime mailings rose 18 percent in the same period. A spokeswoman said the McLean, Va., firm offers competitive and responsible products to a variety of market segments.

Washington Mutual Inc.'s subprime mailings rose 35 percent. A spokesman, however, said the Seattle-based bank targets customers with credit scores above 600, which is the upper range of the subprime market.

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.

"The home equity ATM machine slowed down, and there was a push by banks to expand into other areas," said Scott Anderson, senior economist at Wells Fargo amp; Co. in Minneapolis. "But it's not sustainable for consumers to tap into higher-interest credit cards. Eventually, the bill comes due." Robert Gavin can be reached at rgavin@globe.com.

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