Merrill Concurs: Big Jump Coming In Loss Rates on Consumer Loans

For the second time this week, a Wall Street analyst has issued a report predicting higher loss rates on consumer loans.

Daniel Castro, director of asset-backed securities research at Merrill Lynch, predicted a 20% increase in loan losses in pools of loans that back certain securities.

The higher loss rates "undoubtedly will have an impact on investor perceptions, and therefore are likely to have an impact on spreads for certain bonds later in the year," Mr. Castro said in his monthly report on the asset-backed securities market.

The report, which implies higher securitization costs for some lenders, comes on the heels of a study by Chase Securities that projected higher loss rates in the securities issued by some fast-growing credit card specialists.

The analysts' reports are the latest evidence of concern that consumer debt problems could hurt some lenders as the economy slows down.

The concern is prompted in part by a rapid rise in the level of consumer debt and heated competition for consumer loyalty, particularly in the credit card sector.

Credit card debt has doubled since 1990, said Robert McKinley, president of RAM Research Corp. in Frederick, Md.

"Certainly, consumer income has not doubled in that time," he said.

He warned that credit card delinquencies are currently running at about 5% of outstanding balances.

Chargeoffs, he said, could rise above 4% this year - a high level, but well shy of the 5.8% chargeoff rate during the 1991-1992 recession.

"1996 could be a correction year for all this. Certainly the handwriting is on the wall in the higher debt numbers," Mr. McKinley said.

To be sure, some experts maintain that the concern about delinquencies and chargeoffs is overblown.

Stuart Feldstein, president of SMR Research Corp. in Budd Lake, N.J., said the two rate cuts implemented by the Federal Reserve Board will help by bolstering the economy and lowering the cost of monthly payments for many consumers.

"The Fed has been doing a pretty good job of helping the economy avoid a recession," he said.

Investor worries, however, will have an impact on banks that issue the securities, Mr. Castro said.

Ultimately, he said, greater scrutiny of collateral will lead to a greater differentiation between issuers by investors. And that could lead to higher costs for the poorer performers that want to securitize their loans.

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