CRISIS SPELLS OPPORTUNITY?
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?
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As I said, the way things are going, we could be moving into the right business, at the right time.
