11 Aug How The Subprime Mortgage Debacle Will Affect The Credit Card Industry
We have a heard about the subprime mortgage meltdown. But many have discounted the impact of this calamity on the world of credit card debt buyers.
This past week, MGIC Investment’s stock nosedived after JP Morgan Chase slapped it with a downgrade that, in turn, followed announcements that a planned merger with Radian Group could be on the rocks.
The company, a large private mortgage insurer, announced it may pull out of the deal to acquire Radian Group, a global credit risk management company which offers products and services in the areas of mortgage insurance, financial guaranty and financial services.
The turnaround occurred after MGIC’s mortgage investment partnership with Radian, C-BASS (Credit-Based Servicing and Securitization), became virtually worthless. This happened on July 31, when increased delinquencies and defaults forced banks to make margin calls on credit lines held by C-BASS.
Two mortgage insurance players losing their corporate shirts in what is shaping up to be one of the worst financial miseries in recent times. No way this could affect your Visa card, right?
Wrong-o, gentle reader. Credit card debt buyers are in for a world of hurt.
You see, MGIC and Radian are old friends. In fact, Radian and MGIC each own 34.58% of Sherman Financial Group LLC.
Who the heck is Sherman Financial Group LLC, you ask? Well, anyone who has ever had a delinquent credit card knows the name – or should. This is one of the biggest credit card debt buyers our there.
Sherman Financial Group is an enormous credit card debt buying machine, snapping up delinquent credit cards for pennies on the dollar from such big names as Citibank and Chase, to name but a few. Sherman, through its many entities and related companies, gobbles up billions of dollars in credit card debt each year. Some of that debt is bought after a consumer files for Chapter 7 or Chapter 13 bankruptcy, other debt is purchased at the time the account charges off.
Maybe you know them under a different name – LVNV Funding, Resurgent Capital Services, Sherman Acquisitions, and Alegis Group are a few of the many incarnations of this debt buying conglomerate.
One of the ways that Sherman buys debt is through forward flow agreements. These are contracts signed between the credit card company and a debt buyer whereby the debt buyer agrees in advance to automatically purchase debts as a set price. It works well for both parties because the debt buyer has a fixed cost and the credit card company knows years in advance that debts are going to be taken care of.
So long as the credit card debt buyer has the cash, that is.
You see, if MGIC and Radian lose their shirt then there’s a chance that Sherman won’t have as much liquidity to fund its continuing obligations under their forward flow agreements. Pressed for cash, Sherman would have a few options: (1) back out of these multi-billion dollar forward flow agreements; or (2) push harder to collect on the accounts it owns.
Let’s look at Option One pulling out of the forward flow agreements. If that happens, Sherman is sure to be sued. A lot. Maybe it files for bankruptcy, maybe not. In either case, the credit card companies are no longer able to bank on that money coming in for the sale of their debts. Overnight, billions of dollars in income dries up. Suddenly, Citibank and Chase are maxing out their credit cards to buy groceries and gasoline for the limo.
Now, Option Two – push harder to collect. Sherman’s people are buzzing the phone lines like never before, dialing for dollars. But remember – part of the debt that Sherman buys is already in Chapter 7 or Chapter 13 bankruptcy.
So if Sherman turns the screws on debtors, chances are pretty good that a chunk of those debtors will no longer be obligated to pay these debts. Others will likely be hounded by debt collectors who are suddenly being told to get more money or their jobs are on the line.
What will happen? Nobody knows for sure yet, but don’t think that the subprime mortgage meltdown won’t affect the way that debt collectors operate. Or the credit card industry. Both are in for a shakeout, and it will make the mortgage problems look like child’s play. After all, there are more credit cards out there than homes.
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