The Boston Globe reports that credit card companies have been targeting subprime mortgage holders.
The evidence is stunning. Direct mail credit card offers to subprime customers in the US jumped 41% during 2007's first half, compared with the first half in 2006. By contrast, direct mail offers targeted at customers with the best credit fell 13%. During this same period, defaults on subprime mortgages rose significantly -- in June, nearly 20% of subprime mortgages were at least 60 days past due, and more than 1 in 20 were in foreclosure.
The leaders in selling higher interest rate credit cards to the financially vulnerable includes some subprime mortgage leaders. Here's a partial list:
- HSBC Holdings PLC (NYSE: HBC) leads the direct mail surge -- its subprime direct mailing more than doubled in the first half of 2007 compared to the same period in 2006;
- Capital One Financial Corp.'s (NYSE: COF) subprime mailings rose 18%; and
- Washington Mutual Inc. 's (NYSE: WM) subprime mailings climbed 35%.
It looks to me as though these subprime mortgage lenders are exploiting already weakened borrowers by charging them exorbitant credit card rates to stay afloat as they default on their mortgages. Since their homes are no longer a source of equity, the credit card issuers are betting that enough of these borrowers will make the minimum payment on their credit card bill each month to offset the losses from those who don't pay at all.
In my view, these companies are acting like drug pushers. By defaulting on their mortgages, the borrowers are demonstrating that they can't handle debt. Rather than finding a way to get them to live within their means, the companies are loading up the borrowers with even more debt.
Perhaps the saddest part is that many subprime borrowers will be unable to resist the siren call of these credit card companies. So the cold turkey of debt withdrawal will be even more painful.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
9-28-2007 @ 10:29PM
Stacy Williams said...
The shenanigans of the credit card industry are out of control. Individuals with subprime loans are not the only victims to the predatory tactics of the credit card industry. Changing terms and rates at will leave many people vulnerable to these lenders. Many Americans are literally becoming slaves to the credit industry. Our government should step up to the plate and recognize that the problem is not only in the subprime industry, but also the lack of control by the government exerted over these credit card insurers. Honestly, if people cannot pay a $500.00 mortgage does anyone really expect them to be able to pay $500.00 in finance charges.