IMGCAP(1)]
The homeowner rescue bill the U.S. House of Representatives approved this month could cause a spike in consumer bankruptcies that likely would weaken credit card asset-backed securities, Standard & Poor's Ratings Services said in a report released this week. Credit card issuers use asset-backed securities as a key source of funding for their receivables. The "Helping Families Save Their Home in Bankruptcy Act of 2009," sponsored by Rep. John Conyers Jr., D-Mich., would allow bankruptcy judges in a Chapter 13 bankruptcy proceeding to modify a borrower's home mortgage by reducing both the interest rate and the principal amount on the loan and extending the loan's terms. S&P contends that some 1 million to 4 million U.S. homeowners likely could benefit from filing for bankruptcy protection under the proposed legislation, which in turn likely would trigger a significant increase in credit card charge-offs. Credit card loans typically are charged off within 60 days of a consumer bankruptcy filing. An increase in credit card charge-offs likely would result in greater losses for credit card asset-backed securities transactions, the report says. If Conyers' bill passes, the U.S. credit card charge-off rate could rise an additional one to four percentage points on top of its existing rate, Ildiko Szilank, an S&P primary credit analyst, tells CardLine. S&P estimates that absent the legislation, the overall U.S. charge-off rate will reach 10% this year. "The proposed bankruptcy legislation could bring the credit card charge-off rate to around 14%," Szilank says, citing the difficulty predicting when that might happen because much would depend on when the proposed legislation might pass and go into effect. Total consumer bankruptcies exceeded 1 million last year. S&P Chief Economist David Wyss says absent any change in the bankruptcy code, he expects to see personal bankruptcies rise about 30%, to about 520,000 during the second quarter of 2010 from about 400,000 during the first quarter of this year. "Just how much this proposed legislation could weaken credit card ABS depends on many factors, including the number of obligors in credit card pools with underwater mortgages, their level of income and available assets to satisfy unsecured claims, and individual court decisions, among others," the report says. On March 5, the House approved the homeowner rescue bill, and on March 11 it referred the bill to the Senate Committee on Banking, Housing and Urban Affairs.
