Prices for charged-off credit card debt remain stubbornly high, continuing a trend that began in 2010 as tighter credit standards imposed by lenders began to shrink the available supply.
The freshest paper continues to command the highest prices, 10 cents on the dollar and higher depending on the type of portfolio.
“We have seen prices north of 12 cents for some portfolios,” says Aaron Hadam, a vice president at National Loan Exchange Inc., a delinquent debt broker. “The pricing will vary by portfolio type, but prices for the freshest paper will be the highest, because with originations down there are fewer accounts charging off.”
Private-label card portfolios are commanding among the highest prices because issuers of retail credit cards tend to have more consistent underwriting standards.
“Some general purpose card issuers will vary their underwriting standards based on the type of product, so that can affect the price,” says Deb Everly, senior vice president and chief acquisitions officer at debt buyer Asset Acceptance Capital Corp.
The combination of fewer account originations, new chargeoffs, access to cheap funding because of low interest rates and an increasing pool of investors has created a self-feeding cycle that is sustaining higher prices with each passing month.
“With money cheap and readily available and investors chasing fewer deals, buyers are willing to go after smaller deals if need be,” says Hadam. “All of these factors are helping to drive prices up and keep them up.”
A heightening regulatory environment in several states also is contributing to the sustained jump in prices for fresh chargeoffs. Some states have either enacted or are debating new consumer protection regulations. That is making charged-off accounts in those states less attractive because it may increase compliance costs.
With prices up, buyers can ill afford additional operating costs that eat further into margins. That is especially true with secondary and tertiary accounts that may have incomplete documentation about how the account has been worked to that point.
“There is a lot of uncertainty about new consumer protection rules that are in place or coming to many states, so a lot of buyers are targeting fresh paper because the documentation on those accounts tends to be a lot better,” says Everly. “Better to play it safe.”
California and New York are among the states reportedly considering new consumer protection laws that can impact collection practices.
“There are anywhere from 10 to 15 states considering new consumer protection bills and that has to be taken into consideration when bidding on portfolios with accounts in those states,” says Stacey J. Schacter, president at Vion Receivables Management
Prices for secondary and tertiary paper are averaging between two and four cents depending on the quality, with highs for secondary portfolios reaching five to six cents. Prices are fluctuating by issuer, product type and underwriting criteria.
The upswing in prices for fresh chargeoffs is giving some buyers reason for pause. Schacter says his firm will no longer bid above 10 cents.
“Once prices hit 11 cents we bail out of the bidding,” he says. “A lot of times we’d lose a portfolio and have made the second or third highest bid. Now when we lose, we finish seventh or eighth. There is a lot of creep in pricing across the board and so we are a lot more selective about the deals we pursue. We don’t feel the higher prices are justified.”
Higher prices for credit card chargeoffs have prompted Vion to pursue more deals in other segments of the consumer debt market, such as medical debt.
With demand for fresh paper not expected to subside in the near term little price relief is expected anytime soon.
“I don’t foresee any price relief by the end of the year because credit criteria are not loosening up, at least among the clients I talk to,” says Tim Kirkpatrick, president of LoanTrade Inc.
One potential bump in the road is if energy prices spike dramatically. If that happens, the financial hit to consumer pocket books could further limit a debtor’s ability to pay on a charged-off account, thereby reducing recovery rates.
“Recovery rates have been improving, but if the debtor’s ability to repay gets impacted further, that can hurt business,” says Kirkpatrick.
In the meantime, some debt buyers are becoming sellers.
“I have talked to some buyers that say they are now focusing more on selling because of the high prices to be had,” says Schacter. “Prices need come down at least 20%.”
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