Cap One Cards Not Affected By Mortgage Crisis

While there isn’t much spillover from the mortgage crisis to the credit card industry, there could be a significant indirect effect if the credit crunch leads to a recession, Capital One Chairman and CEO Richard Fairbank said this week at the at the Lehman Brothers Financial Services conference in New York. Capital One’s credit card operation, so far, has weathered the storm, he said.

“We always take a safety-first approach for the company,” Fairbank said. “With our credit-decision making we have always said we can’t forecast a recession, but we’re just going to assume one. This has served us well in terms of [the] high rate of return and low charge-offs that we have enjoyed.”

“Charge-offs are right where we expect them to be. We have not seen the mortgage issues directly spread into the consumer markets that we are in.”

To position itself for economic storms, Capital One expanded from a monoline card company to a more diverse financial firm, primarily through acquisitions of other firms, Fairbank said. While this gave Capital One better diversification, it also exposed the company to the mortgage market, which Capital One hadn’t done business in before.

That turned bad in August when Capital One shut down its Greenpoint Mortgage division, resulting in a large write-down in goodwill and $210 million in charges.

“This (the mortgage market) is a slow-motion, tough challenge out there,” Fairbank said. “Our decision was to put this behind us.”

Even with the shutdown, the mortgage market continues to challenge the company, along with the current yield curve and the normalization of credit, according to Fairbank. He said that 70 percent of Capital One card holders that are at least 90 days behind on their mortgages are current with their Capital One card accounts.

Similarly, more than 11 percent of Capital One’s cardholders that are considered subprime are at least 60 days behind on their mortgages, but only 3 percent of these same consumers are at least 60 days behind on their Capital One payments, according to Fairbank.

However, the company, known for being more of a issuer of credit cards to consumers with good or lower credit is now concentrating in the “super-prime [very good to excellent credit],” high-transactor portion of the market as well as the higher end of the subprime market.