What's Really Going On in Debt Purchasing

For those of you who read the Wall Street Journal yesterday, you may have seen an article about how the debt purchasing industry has been booming and causing an increase in legal cases, which is clogging up our court systems. As I read this article, which I thought was well written despite the typical industry bashing, I wished the journalists had sat in on my presentation at the ACA Fall Forum a few weeks ago (Click here to view slides of the presentation). If they had, they would have realized that debt purchasing activity actually DECLINED from 2007 to 2009, and has remained relatively FLAT from 2009 to 2010.

What has increased over the past year is the prices for portfolios due to increased demand and the willingness of certain credit issuers to customize portfolios to maximize their sales potential:

Pricing of Credit Card Portfolios

You may be asking yourself, “Why haven’t portfolio sales increased in 2010 if prices have risen as much as 50% or more over the past year?” Good question!

The primary reason is because most credit issuers reached a peak in their charge-off volumes earlier this year, and today they don’t have as much to sell. Also, banks typically do not change their sales volumes to meet market demand unless they need to reach a certain revenue target for the year. Since most banks have already hit their targets for 2010, I wouldn’t count on any significant changes between now and year-end.

The higher prices may motivate some banks to sell a greater percentage of their charged off credit card portfolios next year, but I am still betting that 2011 purchasing activity will at best be the same as 2010, which may cause prices to increase even further. With credit card originations declining since 2008, we can assume that the volume of credit card charge-offs will not increase for at least the next couple of years.

Had enough doom and gloom yet? There is a silver lining, sort of. The decline of charged off credit card sales in the primary market (credit issuer to debt buyer) has caused an increase in portfolio sales activity in the secondary market (debt buyer to debt buyer). This market was virtually dead at the beginning of the credit crunch/recession in late ’07. Some sales continued throughout ’08 and ’09, primarily “flips” – a debt buyer purchases a portfolio from a credit issuer and immediately turns around and re-sells a portion or all of the portfolio to one or more secondary debt buyers. However, over the past year there has been a significant increase in secondary market sales, a trend that should continue going forward.

For those debt buyers who are heavily reliant on purchasing charged off credit card portfolios, here are some suggestions on how to survive and thrive during the next couple of years:

• Consider diversifying into other, similar markets – here are a few suggestions that other credit card debt buyers are pursuing: Personal (Consumer) Loans, HELOCS (Home Equity Lines of Credit), Auto Deficiencies, Student Loans, Commercial Credit Cards, Bankruptcy

• If you are focused on the earlier stages of delinquency (Fresh and Prime), consider expanding into later stages – costs less and there is more volume available today

• Small balance debt buyers can also consider the Telecom market – consumer or commercial

• Larger balance debt buyers may wish to consider traditional commercial debt

• If you are a state-specialized debt buyer, consider outsourcing your collection capabilities to other debt buyers on a commission basis

I appreciate that this is a tough time for many debt buyers, but be rest assured that the markets will eventually improve. For now, focus on survival, which means diversify – new debt types, new markets, new stages of delinquency and possibly geographic expansion.

Next week I will be discussing credit card portfolio liquidation performance by stage of delinquency.

If you have any questions feel free to give me a call.