Composure While Under Pressure
For those in the credit market, equanimity is a virtue that will be tested. Nothing can prove more unsettling than bad news, and in today’s current financial environment, bad news is in abundance. But as the federal government executes its rescue package and creditors across the board reassess their lending guidelines and risk mitigation procedures during this economic calamity, those with a more grounded approach to growth will certainly survive.
This may seem a bit optimistic, but there are strong companies out there. For example, during the frenzy of the housing boom, banking institutions that focused on core business operations rather than diving headlong into the housing market for quick growth have faired much better than their competitors. A good example of this is PNC Financial Services Group, whose profit actually rose 19 percent in the second quarter while also finalizing its 2008 acquisition of Sterling Financial, a multibank holding company.
Though there are some bright spots, there are indeed also causes for anxiety. The general upward trend in delinquencies and charge-offs across many debt types has lasted for over a year and economic conditions, especially unemployment, remain troubling. But just how bad could the deterioration in credit quality get?
In a recent article, credit card charge-offs were projected by a research firm as potentially reaching a total of $96 billion for 2009. How likely is such an increase of charged off credit card debt?
If you were to take the total outstanding receivables of the top 15 largest credit card issuers – the top 10 make up between 85-90 percent of the market – these institutions would have to maintain an average charge-off rate of at least 12 percent for the entirety of 2009. Impossible? No, but highly improbable.
Even considering a job market that is likely to remain weak, a 12 percent charge-off rate seems difficult to imagine. In June of 2003, when the unemployment rate reached 6.3 percent, the charge-off rate within the Standard & Poor’s Credit Card Quality Index was just a little over 7.0 percent. During the weak employment environment between 2002 and 2003, the index reported an average charge-off rate of 7.0 percent. With an average charge-off rate of 7.0 percent, you’d be looking at a total of about $54 billion in charged off card debt by the end of 2009 – not taking into consideration tightened lending standards or any increased emphasis in pre-charge off collection efforts in the current economic environment.
It will get worse in financial services before it gets better. But a little perspective goes a long way before declaring another Great Depression.
Personal Income Gains Tamped Down by Inflation, Unemployment
In their most recent release, the Census Bureau reported that median annual household income in the U.S. rose by 1.3 percent in 2007 to $50,233. In addition, real earnings for both men and women also experienced gains in 2007. Real median earnings for men and women who worked fulltime on a year-round basis rose 3.8 percent and 5 percent respectively, following three years of annual declines.
But in spite of this relatively good news, the reality is that 35.5 percent of American households still bring in less than $35,000 annually.
Furthermore, for households in the 20th percentile of income distribution, annual income actually fell 1.5 percent to $20,291. It is how these low to moderate income households have faired since the end of 2007 that remains a focal point to creditors and the accounts receivable management (ARM) industry regarding collections performance.
Although the sharp increases experienced in consumer prices over the months of May, June and July have only acted to further strain these low to moderate income households, of particular concern has been the health of the job market.
Unemployment – arguably the most important factor in ARM industry performance – now stands at 5.7 percent and inflation is now at 5.6 percent, so it is obvious that the income gains reported for 2007 have not held. As these less affluent households contend with their debts and other obligations, the job losses observed through the first half of 2008 are widely expected to continue into 2009.
What is certain is that current incomes are lower than their 2007 levels and with disposable personal income (DPI) having decreased by 1.9 percent in June, the likelihood of a turnaround in collections performance from a disappointing second quarter is unlikely.
Confidence, Public Perception and Collectability
Aside from calamity, few things have a more acute impact on consumer sentiment than price increases on consumer goods. U.S. households devote both time and energy in constructing and following (or at least attempting to follow) a monthly budget to save money. But as strictly as consumers try to follow their budgetary guidelines, in today’s economy Americans are finding it increasingly difficult to maintain these spending limits with consumer price inflation -- now at 5 percent as of July for urban consumers -- raising the cost of goods and services.
To compensate for what seems to be the weekly increase in the cost of everything, consumers have shifted their financial habits signaling intentions to reduce monthly savings, cut back on outings to the movies or eating out, and putt off that planned vacation. It’s really no wonder consumer confidence has fallen off a precipice over the last year.
But for those in the accounts receivable management industry, creditors and collection agencies alike, most concerning is the continued weakness of the job market. June’s loss of 62,000 jobs was followed by July’s shedding of an additional 51,000 jobs, bringing the unemployment rate to 5.7 percent, a four year high (“Unemployment Rate Jumps to 5.7 Percent, Four-Year High,” Aug. 1). Adequate job security or not, this news continues to affect consumers who evaluate what does and does not take priority when checks go out on the first of the month – directly impacting those servicing or collecting on delinquent accounts.
With this economic environment and corresponding consumer negativity it’s little wonder that the Kaulkin Ginsberg Index (KGI) – the leading indicator of economic conditions affecting the accounts receivable management (ARM) and debt management industries – continued its year-long descent. In its most recent reading the KGI tumbled 8.0 percent year over year (“ARM Index Shows Continuing Erosion of Collection Environment,” May 30).
As more consumers find themselves hunting for a job or stumbling into part-time employment, the adverse effects of the increasingly weak job market will continue to impact the collection of bad debt.
Though the ARM industry is generally considered to be recession-resistant, no industry is recession-proof.
The question that remains to be answered: Just how deeply has the one-two combination of “price increases” and “rising unemployment” affected the bottom line of the ARM industry? How deeply will these factors affect your bottom line?
I'd love to hear our readers chime in and give us their perspective on the current operating environment.
Credit Card Delinquency Rate Decline Could Prove Short Lived
Credit card delinquencies, like charge-offs, have trended upward over the past year. That is until recent reports on the credit card market by both TransUnion and Standard & Poor’s noted that credit card delinquencies – defined as the percentage of borrowers 30 to 90 or more days past due – had experienced a moderate decline.
In its monthly analysis of the U.S. Credit Card Quality Index (CCQI), Standard & Poor’s reported that the delinquency rate for the CCQI – comprised of 22 master trusts of bank card and credit card backed securities – declined from 4.5 percent in March to 4.4 percent in April, following eight consecutive months of increases.
On a similar note to the findings by S&P, TransUnion in its quarterly credit card analysis reported that for the first time since the beginning of 2007, the average national credit card loan delinquency rate experienced a relevant quarterly decline in the first three months of 2008. According to TransUnion, the ratio of credit card borrowers delinquent on one or more of their credit card accounts declined to 1.19 percent in the first quarter of 2008, a drop of 12.5 percent from the previous quarter.
Amid the continued deterioration of credit card debt quality within the U.S. market, this news was a welcomed reprieve. As stated by Ezra Becker, principle consultant in TransUnion’s financial services group, this development may signal that “consumers have begun to take stock of their overall debt and begun to catch up on their repayment schedules.” Though a bit optimistic, this could be a plausible conclusion as negative sentiments regarding the current economy, job market and personal financial stability continue to hammer away U.S. consumers’ willingness to take on new debts.
So if cash-strapped consumers are now paying off debts instead of taking on more, creditors will need to figure out how exactly their internal recovery efforts help position them within consumers’ minds as the creditor of first choice for repayment. And if this latest round of delinquency data proves to be an anomaly, expect to see late payments rise again later in 2008.
Gasoline Price Milestone and the Frugal Consumer
As the price of necessities such as gasoline have continued to climb, the economic mood remains negative as illustrated most recently by the Conference Board’s Consumer Confidence Index, which declined yet again from 62.8 points in April to 57.2 points in May. This was an overall decline of more than 47 percent from the 108.5 points reported in May of 2007.
Household budgets already stretched precariously thin during recent months, were met on Sunday with another milestone -- record breaking gasoline prices. The American Automobile Association (AAA) announced that the average price of gasoline nationwide reached $4 a gallon for the first time in history. Undoubtedly the soaring price of gas, which has risen 29 percent over the past year, has done its part in dampening consumer sentiment.
This consumer pessimism is hard to argue with and signal consumers have remained challenged by the broader economic downturn. Now with the average price of gasoline in the U.S. at $4.00 a gallon and spending on fuel accounting for more than 6 percent of wage income, the fear that has come front and center is the risk of declining consumer spending as confidence plummets.
Fears of slowed spending are understandable with the unemployment rate now standing at 5.5 percent and as 54 percent of consumers surveyed by the Discover Spending Monitor saying their personal finances are getting worse ("Discover U.S. Spending Monitor Rises 1.4 Points in May," June 4). Most telling, 42 percent of respondents reported putting less into saving as a response to high fuel costs, while 48 percent of respondents planned to spend less on discretionary purchases, up five points over the last three months.
Tightened budgets and a heightened awareness of one’s financial burdens will inevitably produce a difficult recovery environment for collectors, but to what extent will the severity of this slowdown be felt in accounts receivable management and for how long, remain to be seen.
Do ‘Expectations’ of Decreased Spending Mean Less Spending?
First, survey firm Gallup reported in an April poll that Americans had less money for discretionary spending. Half of consumers told Gallup that as the price of gasoline has increased over the past year, the amount of money they had available for entertainment and recreation had declined.Then, in a poll released on May 9, Gallup reported that 60 percent of Americans said they were cutting back significantly on their household spending to compensate for the rising cost of fuel.
It seems clear that increasing fuel prices are here to stay and a growing number of Americans have tightened their belts and cut back on spending elsewhere.
Headlines awash in news of unemployment and financial insecurity are another factor influencing consumer budgets. As sentiment of the overall economy has declined throughout the year, consumer expectations of cutting back on their spending have also persisted, according to the Discover U.S. Spending Monitor. In April, the Monitor showed that 57 percent of consumers making under $40,000 a year and 54 percent of those making between $40,000 and $75,000 a year, were planning on curtailing discretionary spending. The Monitor, designed as an Index on consumer spending, has declined more than 14 percent from its initial 100 point start a year ago.
As Americans added $15.29 billion to outstanding credit balances in March – for an annual rate of 7.2 percent – it is difficult to predict whether or not these expectations of reduced discretionary spending will fully materialize. What is certain is that as macro-level factors like the rising cost of fuel stretch household budgets, such issues will continue to make for great press.
For Consumers, Food as the Breaking Point?
With recent reports of Costco and Wal-Mart limiting the amount of rice their customers may buy per trip, it would appear that Americans too are feeling the pressure of the global increase of food costs.
In an April 18 to April 20 poll conducted by Gallup, 46 percent of Americans reported that the current cost of food was causing them financial hardship. When broken down by income, 28 percent of respondents making $75,000 or more said that food price increases were causing them financial hardship, while 50 percent of respondents making $30,000 to $75,000 agreed with that statement.
But of all respondents those who described being most heavily burdened by the rising cost of food were Americans making less than $30,000 a year, the lowest income demographic, with 64 percent of this group reporting that food prices were causing financial hardship.
The bad news for consumers has been spelled out in a recent three-part series of statistical analysis from Trend Data, a database of 27 million anonymous consumer records sampled from TransUnion, the consumer information house. Trend Data uses the database to create a quarterly consumer lending analysis with a focus on the credit card, auto loan, and mortgage sectors.
In the auto loan arena, Trend Data projected that the national 60-day auto loan delinquency rate would rise by 33 percent through 2008 to reach 1.05 percent at year’s end.
Trend Data also projected that the national 90-day user delinquency rate on bankcards would increase to 1.9 percent by the end of 2008 from 1.36 percent in the fourth quarter of 2007.
Consider the fact that from 1983 to 2004 growth in credit card use was sharpest among families making $30,000 year or less, rising from 11 percent to 37 percent of families in 2004, suggesting that any additional financial pressure this year on these households carries additional risk of default.
Trend Data also projected that the national 60-day mortgage delinquency rate would increase from the nearly 3.0 percent reported in the fourth quarter of 2007 to 4.0 percent by the end of 2008, a 33 percent increase.
Consumer economic perception may not exactly match consumer economic reality but one thing is for certain - Americans are indeed finding it harder to pay their debts. Whether this trend continues throughout the year remains uncertain, but the impact to creditors and their agency partners is sure to be felt.
Department Stores and Debt Collectors Can Find Solace on Common Ground
Last week, retail weakness was highlighted in the release of flat U.S. same-store sales figures for the month of March.
Amid a weakening economy and rising unemployment numbers, retailers such as Gap Inc., American Eagle and Abercrombie & Fitch to name just a few, have continued to struggle, posting same-store sales declines in March of 18 percent, 12 percent and 10 percent respectively.
This news of course came as no surprise as consumer confidence – an increasingly watched barometer of overall economic health – throughout the first quarter has seen steady declines across the board in many indices tracking consumer sentiment.
Lowered monthly sales figures for retailers from apparel chains to department stores has been one of the manifestations of this plunge in overall consumer confidence about the economy and their own personal financial health. Another affect has been a shift in discretionary spending behavior focusing more on necessities as more Americans worry about the cost of essentials such as food and fuel, recently reported by a Gallup poll showing that the cost of food has superseded consumer concerns over the cost of healthcare.
This shift in part can explain why Wal-Mart Stores reported a rise of 0.7 percent in U.S. same-store sales, led by an increase of 0.9 percent in its namesake Wal-Mart chain from continued strength among sales of groceries and health and wellness products.
As news of the unemployment rate rising to 5.1 percent following the lose of 80,000 jobs in March and consumer bankruptcy filings increased 27 percent compared with the same period last year (“Economy Creating a Challenging Collections Environment”), consumers will continue to react to such news with increased anxiety, pushing this shift in discretionary spending behavior. Such figures will inevitably present collections challenges, but to what extent these numbers will impact the accounts receivable management industry moving into the second quarters remains to be seen.
Federal Family Education Loan Lending Under Pressure
As the credit crunch continues, the student loan lending market has suffered. Witness Waco, Texas-based Brazos Higher Education Service Corp., becoming the latest student lender to stop making new loans to students through the Federal Family Education Loans (FFEL) program for the 2008-2009 academic year.
Brazos joined a list of 26 other private lenders that have stopped originating federal loans according to a recent statement by FinAid.org, a publication focused on financial aid.
Though the credit crunch has perpetuated the problem of lenders exiting the market - as investors shy away from securities backed by student loans reducing the availability of capital for lenders - the September 2007 passage of the College Cost Reduction and Access Act of 2007 (CCRA) and its focus on subsidy cuts further decreased the profitability of federal loans for these lenders.
The cuts included the elimination of an “Exceptional Performer” status that allowed lenders to receive higher insurance rates on defaulted loans, and reduced the insurance paid by the federal government to lenders on defaulted loans from 98 percent down to 95 percent by October 1, 2012.
The CCRA also increased the loan fees paid to the Department of Education by student loan lenders from 0.5 percent to 1 percent of the principal amount of the originated loan. These fees cannot be passed on to borrowers.
Though premature, it is possible an academic funding gap could arise, as such large lenders as College Loan Corp. and the Pennsylvania Higher Education Assistance Agency announce they would stop originating FFEL loans for the upcoming term.
Private student loans would likely be an easy finance option for many facing any such gap. With fees and interest rates at times double those of their federally-backed counterparts, private student loans inevitably carry a higher risk of default. As this market continues to grow so too will the growth of the private student loan collection market.
Federal Security Changes Will Impact ED, IRS Collectors
For agencies working on behalf of the U.S. Department of Education (ED) or the Internal Revenue Service, comments made at recent Senate hearing may indicate future complications for data security compliance.
Several experts testified that vulnerabilities still existed in federal agencies’ handling of data security, and that the federal government continued to struggle in keeping its information systems secure.
It appeared clear that the Senate Homeland Security Committee was prepared for alarming news when it named the hearing “Agencies in Peril: Are We Doing Enough to Protect Federal IT and Secure Sensitive Information?” Much of the hearing revolved around the Federal Information Security Management Act (FISMA).
Greg Wilshusen, Information Technology Director for the Government Accountability Office, said that “Twenty of 24 major federal agencies continue to experience data security troubles.”
According to Wilshusen, most agencies “did not implement controls for limiting system access or guarding against intrusion, nor did they regularly configure devices to fix vulnerabilities.”
Both Wilshusen and Cyber Security Industry Alliance President Tim Bennett agreed legislation to enhance FISMA is needed. While the hearing was not focused on a specific bill, the U.S. House is considering a measure to ramp up security as well as reporting and auditing requirements.
Toughening federal government security programs will probably impact the 17 private collection agencies currently on the ED contract, and the two working on behalf of the IRS (“IRS Renews Collection Contracts with Two Agencies,” March 4). Bottom line, FISMA requirements involve the auditing of partners to federal agencies, a fact that became clear when ED announced in January that that some its agency partners would undergo data security audits by the Office of Inspector General.
Any future changes or enhancements to FISMA would surely lead to more headaches for these ARM partners.
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