On the flip side of the recent rise in credit card loan delinquencies are growth opportunities for some home lenders.
While financial institutions grapple with the implications of that 15- year peak in delinquency rates, companies that make loans to people with blemished credit records are preparing to pounce on a new set of prospects.
"High card delinquency rates create a whole new pool of subprime borrowers," said Robert Stata, vice president for originations at Cityscape Corp., Elmsford, N.Y. "That creates an opportunity for us."
Once borrowers with good credit histories fall behind, the theory goes, they will no longer qualify for a bank mortgage or home equity loan. Instead, they will be forced to look to a nonbank such as a finance company, which would be more forgiving - but would charge higher interest rates.
"People come in and out of the B and C (credit status)," said Mary Chiappetta, vice president at Amresco Residential Credit Corp., an Ontario, Calif.-based wholesaler that purchases subprime loan portfolios. "It's a good possibility that more borrowers will be moving into that pile."
Many consumers will seek a home equity loan to pay off their debts, and in turn reduce their monthly repayment burden. "People will need to consolidate their debt and restructure it," Mr. Stata said.
Banks are already beginning to turn down some loan-hungry consumers, according to the Federal Reserve Banks' May survey of senior loan officers.
A majority of participants said they were more reluctant to lend to consumers during the second quarter of this year.
Home equity lenders have wasted no time stepping in to fill the gap in consumer credit demand.
Debt consolidation products, which reduce many monthly bills into a single payment, are driving the home equity industry, said James Moore, chief executive of Contifinancial Corp., New York.
"People are already increasingly stretched - if someone in the household gets ill, their bills may fall into arrears," said Thomas O'Donnell, an analyst with Smith Barney & Co., New York. "Savvy subprime lenders will target the people with spots on their credit records."
While consumers who consolidate their debts end up paying more in the long run, the impulse to take out a consolidation loan is natural, said David Levy, director of forecasting at the Jerome Levy Economics Institute, Mount Kisco, N.Y. "If you're rafting and you fall overboard, you'll swim over to a log if that's closer to you than the shore."
High debt-to-income ratios are concentrated in lower-income consumer segments, said Mr. Levy. Eventually, borrowers will divide into two tiers: people with high incomes and good credit records; and those with low incomes and poor credit histories.
Competition among credit card issuers has made rising debt loads possible, said Mr. O'Donnell of Smith Barney. Potentially risky borrowers are given high lines of credit that they wouldn't have qualified for years ago, he said.
Mr. Moore of Contifinancial said some 80% of securitized home equity loans were used for debt consolidation last year, up from 50% a few years ago.