Card Securitizations Should Remain Strong Despite Mortgage Problems

November 13 2007

By Burney Simpson,

The sale of securities backed by credit card assets will continue to be strong, even as those backed by mortgages falter, according to research from the TowerGroup. The large credit card banks have issued $69.2 billion in credit card asset backed securities (ABS) through September this year, a rise of more than 30 percent from the same period in 2006, and an indication of the strength of the card market, according to the TowerGroup report “Credit Card Asset Securitizations: Has the Subprime Meltdown Dampened This Market Too?”

The answer is yes, writes report author Dennis Moroney, but investors remain attracted to card-backed ABS despite the subprime mortgage market collapse. Moroney projects that the issuance of card-backed ABS will slow in the fourth quarter due to investor uneasiness but will finish 25 percent higher than in 2006.

Card issuers sell an ABS against a portfolio of credit card debt to raise funds. The issuer uses the revenue to back further credit card loans to cardholders. The buyer of the ABS gets a return based on the credit quality of the card debt in the portfolio. The card ABS market is worth more than $400 billion and accounts for about half of the funding for credit card loans, according to Moroney, a senior research analyst, bank cards.

There are several factors impacting the card ABS market now. Consumers have been returning to credit cards to fund their lifestyles after turning away from home equity lines of credit, known as HELOC, due to rising interest rates, Moroney reports. That return to cards is indicated by the annualized 6 percent growth rate of credit card balances through the second quarter as reported by the Federal Reserve.

The ABS market has also been impacted by the slowing economy and rising consumer debt levels that have driven more consumers to go delinquent on their card bills. Delinquencies and credit losses will continue at least through the first half of 2008, writes Moroney. Then, the ABS market was hit with the collapse of the subprime mortgage market, which had issued pools of securitized debt.

Despite these problems, Moroney writes that the card ABS market should continue to be healthy as consumers increasingly turn to their cards for purchases. In addition, these large banks will remain committed to the market after writing off losses from their investments in subprime mortgages.