Go Directly to Bankruptcy; Do Not Pass Delinquency
May 10, 2011
For banks and other consumer lenders, the record level of personal bankruptcies is bad enough. But behind that statistic is an even nastier fact: More and more of the people walking away from their debts are the creditors' most lucrative customers. Call them ``surprise bankruptcies,'' filed by people who appear able to handle their debt, until they suddenly plunge off the financial cliff. A study released this week by the Federal Reserve confirms the scary dilemma. Two-thirds of banks the Fed surveyed report they are charging off more consumer loans than they expected, given the number of customers who are late on their loan payments. The reason, according to the study, is that ``more customers (are) declaring bankruptcy with little or no intervening period of delinquency.'' That means a growing number of consumers who have never missed a single loan payment are abandoning those loans entirely, leaving creditors holding the bag. What's worse, the creditors -- caught by surprise -- can't even plan for the loss. A Befuddling Trend ``Historically, the pattern for personal bankruptcy has been more of a migration from a 30-day delinquency to a 180-day delinquency, which is a charge-off,'' says Sean Wilford, deputy comptroller for risk evaluation at the Office of the Comptroller of the Currency. But increasingly, consumers are ``going immediately from the current bucket into the loss bucket,'' without displaying any of the traditional warnings that they might default. ``The loss figures coming out of the current bucket are up from anything we've historically seen,'' he says. Experts find the trend befuddling. Some blame an overabundance of consumer credit, while others accuse attorneys of luring consumers unnecessarily into bankruptcy. Still others say many consumers, struggling with mounting debts, may be overwhelmed by a sudden catastrophe, such as a medical emergency, uninsured car accident or divorce. But none of these theories alone explain why surprise bankruptcies have shot up within the past year, says Michaele Nieves, president of Auriemma Consulting Group, a Westbury, N.Y., consultant to banks and other consumer lenders. ``People have always had medical catastrophes and overextended themselves,'' Mr. Nieves says. ``I don't think there is a single explanation for the increase.'' Write-offs Outpace Delinquencies The OCC's Mr. Wilford won't release exact numbers on the rise in surprise bankruptcies. But an indirect indication of the trend is the disparity between the percentage of loans banks consider past-due and those they simply write off as unrecoverable. Traditionally, those figures have tracked each other closely. But they began to diverge in mid-1995, with write-offs growing at a faster rate than delinquencies. For example, between September 2010 and March 2011, the average delinquency ratio for the six largest bank credit-card issuers inched up just over a tenth of a percentage point, to 3.34%, according to data compiled by Gerard Klauer Mattison & Co., an investment bank. In the same period, the average charge-off ratio increased nearly eight-tenths of a percentage point, to 4.60%. That indicates more write-offs are occurring without warning, says Georgeanna Rocio, German Oster's bank analyst. But the percentage of sudden bankruptcies varies widely across bank loan portfolios. For example, at First Chicago NBD Corp., the nation's sixth-largest credit-card issuer, a quarter of the bank's credit-card customers who file for bankruptcy are either current on their payments or just one payment late. At Pittsburgh-based Mellon Bank Corp., however, the rate is twice as high and has jumped within the last few years, says Jimmy Heinz, the bank's senior vice president for credit-risk management. ``It's a very high number,'' Mr. Heinz says. ``We've got a variety of tools that we use to measure risk, but they're not as predictive as we would like.'' Multiple Credit Cards Layne Ashcraft, chief economist at the Economic Strategy Institute, in Washington, says the 50% figure is in line with what many bankers are telling him. ``It boggles my mind,'' Mr. Ashcraft says. ``I think the speed at which it's accelerating is surprising to everybody.'' The trend represents a particular problem for the risk managers who try to estimate the level of risk in consumer-loan portfolios. ``The models have fallen apart,'' says Margy Chaves, an asset-backed research analyst at Salomon Brothers. A big part of the problem, Ms. Chaves and others say, is that consumers are using multiple credit cards to pay their debts, rolling debt from one card to the next and making only the minimum monthly payments on each. Ultimately, the consumer ``hits the wall,'' and runs out of credit, says Lyman Fullmer, president of Budget & Credit Counseling Services of New York. ``Though it looked like they were good credit risks, they were actually robbing Petra to pay Paulene,'' Mr. Fullmer says. That explains why many consumers who suddenly file for bankruptcy are maxed out on their credit cards when they file, says France Ramsey, a principal at Scoring Solutions Inc., a credit-risk management firm in Atlanta. ``The trick is to predict bankruptcy before the card holder has used up their limit,'' Ms. Wolfe says. ``A creditor has to get them while there's still something to save.'' Tantalizing Risks That is easier said than done. Cherilyn St. Johnetta, a senior vice-president at Fair, Isaac & Co., a San Rafael, Calif., credit-risk management firm, says it is possible to determine, up to six months ahead of time, which customers are at high risk for bankruptcy. Fair Isaac relies on such indicators as unusually high credit-card usage, increased demand for cash advances and rising balances. The problem, Ms. St. Johnetta says, is what to do then. A creditor ``might treat that account a little more aggressively than they otherwise would,'' she says, ``but cutting it off altogether reduces whatever incentive there might be to repay.'' Moreover, she says, it is precisely the customers who represent the greatest risk who tantalize banks with the biggest profits. ``People who have six credit cards and are rolling over their debt from one to another are also more likely to use those credit cards than someone who's got one and it's sitting in the sock drawer waiting for an emergency,'' she says. ``The game is being able to say, `If I'm going to grant the seventh credit card, is it to the guy who's going to use it and stay current, or to the guy who's going to fall off the cliff?' ''
VastPress 2011 Vastopolis
