IMGCAP(1)]
This article appears in the July issue of Collections & Credit Risk.
By Darren Waggoner
Against the economic odds, hopes are rising among collection agency executives that happier days will be here again – as soon as early next year.
While the nation at midyear remains mired in a deep recession, many collection industry insiders expect improved liquidation rates and payment patterns – true signs an economic recovery has started – by early 2010. They're clinging to nuggets of good economic news buried in an onslaught of negativity.
In the first quarter, publicly traded collection agencies fared better compared with the last quarter of 2008.
Sameer Gokhale, senior vice president and research analyst at investment firm KBW in New York, credits some of that lift to tax refunds that consumers directed to repay debts. But, in April, collections held up again. And, yet again in May. "It seems like the worst is behind us," he says. "Collections are still weak but not as weak as they were."
More glass-half-full news: In May, U.S. consumer confidence soared to the highest mark in eight months as severe strains in the labor market showed signs of easing, reports The Conference Board. While Americans' collective mood about the economy remained downbeat by historical standards, it was the biggest jump in six years and may mean consumers soon will feel more comfortable paying down debts – as well as increasing other spending.
David A. Schieszer, chief operating officer at Southwest Credit, puts a lot of faith in the confidence reports foretelling a recovery. "Although most economic experts believe the recession will not end at the earliest until late 2009 or in 2010, I think the [accounts receivable management] industry will see an upswing in results as the consumer confidence indicators increase. In certain areas I think we've already seen signs of this and as the confidence grows, if it continues to grow, I believe the ARM industry will be one of the first beneficiaries."
The Current Reality
Despite glimmers of hope, the U.S. remains in the throes of the worst economic spin in 80 years. Just last month, American icon General Motors filed for bankruptcy. Lehman Brothers shut down last fall; then came the first news of multibillion-dollar government bailout plans.
And there's always more to fret about:
• Unemployment is creeping higher, and many economists expect it to hit 10%. The rate is not climbing as fast as it was in the early part of the recession but the percentage is hard to ignore. The rate is a bellwether for recovery performance.
• Credit card losses reached record marks in April although the rate of increase slowed, according to a Fitch Ratings report. Target Corp., for example, showed an improvement in early-stage credit card delinquencies from March to April.
• Housing prices have dropped 32.2% since peaking in the second quarter of 2006 and are at levels not seen since late 2002. Standard & Poor's/Case-Shiller National Home Price index released in late May reported prices tumbled by 19.1% in the first quarter, the largest quarterly drop in its 21-year history.
More than 342,000 U.S. properties in April received foreclosure filings, including default notices, auction sale notices and bank repossessions, a jump of 32% from April 2008 but an increase of less than 1% from March, according to RealtyTrac, an online marketplace for foreclosure properties.
James Saccacio, RealtyTrac CEO, said the data suggest many lenders and servicers have begun foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria. "It's likely we'll see a corresponding spike in [repossessions] as these loans move through the foreclosure process over the next few months," he says.
Anecdotal evidence from the housing sector has offered some encouragement.
"I see spotty areas that indicate there may be some visual of a bottom to the building industry recession," says Tom Muter, accounts receivable manager at Contract Lumber in Pataskala, Ohio. "There's more returning traffic at the model homes and condos [and that ultimately] means more sales."
The caveat is even if builders start building again now, the time needed to obtain permits pushes into the late fall or early winter – the traditional down cycle.
"But I think positioning for debt buying and the collection business is very good right now," Muter adds. "As the economy turns and the market improves there will be more cash flow and even the ones struggling will have more money."
Adds Susan K. Hickman, collection manager at The Independent Savings Plan Company Inc., a finance company in Tampa, Fla., "I don't think we've hit bottom but I do believe the down slope has slowed. I don't expect real recovery until the fourth quarter or the first quarter of 2010. It will be slowed until the construction industry starts coming back."
Industry Performance
At Tate & Kirlin Associates, a Philadelphia-based accounts receivable management firm, collections this year through April were tracking 23% higher compared with the same period in 2008.
"Our average collections per collector is the highest it has ever been," says Jerry Smith, director of operations. "The number of collectors in 2009 is actually down from [at any point from 2006 to 2008]."
Liquidations at AmSher Receivables Management, an accounts receivable management firm in Birmingham, Ala., were down just 0.5% in the first quarter compared to the first quarter of 2008. Liquidations have been up for the last two quarters, says Martin Sher, co-CEO at AmSher. "I'm certainly more positive now than I was at the end of 2008," he says.
At The Affiliated Group, a collection agency in Rochester, Minn., recoveries this year have declined about 5% to 10%. Placements have been up about 10% to 15%. Mark Neeb, president and CEO, believes recoveries may have been good in February and March because of tax refunds but recoveries held steady in April and May, he adds. Neeb still worries about rising unemployment and what will happen when unemployment checks run out.
Collection agencies in the past year have watched the economy take a toll on their financial health. Collections & Credit Risk has extensively covered this subject throughout the recession including "Profits Slow To A Trickle," April 2009.
That trend is a stark reversal from one year ago when many agencies were adding collectors to handle a surge in placements brought on by the weakening economy.
Then, the industry saw a shortage of skilled collectors, several executives told Collections & Credit Risk at the time. Now, with a long period of lagging payments, agencies are more likely to be making cuts. More than 28% of accounts receivable management firms reported layoffs in the first quarter, according to a recent study by consultant Kaulkin Ginsberg.
Credit Tightening
On the credit-granting side, at BECU, the nation's fourth-largest credit union with more than $8 billion in assets, delinquencies may have peaked. Thirty-day delinquencies for auto loans and credit cards have declined, says Aaron Bresko, vice president of lending at the Seattle-based credit union.
Charge-offs, however, are still rising and Bresko expects that will continue into the second half of the year, before stabilizing or declining. Like other lenders, BECU has beefed up its collections staff. The credit union also has tightened underwriting standards which, Bresko says, should lead to lower charge-offs in about 12 months. "We will be stronger," he says.
Other creditors are scrambling to adjust lending strategies, says Edmund Tribue, global practice leader at MasterCard Advisors, a consulting firm.
With new tactics taking hold, Tribue expects the pace of loan defaults to slow through this year. His forecast for a general recovery: Not until early 2010.
