Second Half Outlook? As Bad as the First Six Months: Creditor Analysts

The first half of 2008 marked the continuation of the credit crunch, increasing delinquencies and chargeoffs and a weakening economy. How does the second half of the year look? InsideARM spoke with several industry executives to get their take on the economy and the receivables business. In this story, one of a series looking at the next six months, insideARM talked to financial industry analysts.

“The economy won’t be any rosier in the second half of the year than it was in the first half,” said Jeanne Capachin, vice president of research, Financial Insights, an IDC company in Framingham, Mass. “The past credit [evaluation] models aren’t as effective right now. People no longer have the access to home equity lines like they once did.”

Consumer behavior has changed, too, Capachin said. But the credit scoring models have yet to account for changes in consumer behavior, such as those who are staying current on credit cards rather than mortgage debt, or the lack of home equity credit to draw on.

Therefore in the next six months Capachin expects creditors to return to classic lending basics, including larger down payments for mortgage borrowers. Zero percent down was one of the popular loan products during the credit bubble. Similarly, she expects stronger loan requirements for small business borrowers, with credit grantors requiring solid balance sheets, and profit and loss records.

“The credit market is still tightening up,” Capachin said.

Brad Neigel, senior analyst in the lending division of Aite Group in Boston, agreed.

“The worst is still ahead of us,” Neigel said. “This could carry into 2009. Things [credit availability] may never be as good as they were.”

Neigel expects delinquencies to increase 10 to 20 percent for each of the next few quarters, with auto financing starting to weaken, though he does believe the subprime home lending market has probably bottomed out.

He also expects to see further chargeoffs by creditors because even if a lender forecloses on a property, in many instances, that now represents a depreciating asset on the books. In the past, homes tended to appreciate or hold their value.

As delinquencies grow, lenders will try to keep the “easy” collections in house while sending the harder ones to third-party firms, Neigel said, adding that the collection firms that will be successful in this environment will be the ones that can prove they are effective collecting money for the lender, who will then assign those collectors more accounts.