American Home, IndyMac: Cash or Credit?

Interesting news from my favorite online stock site TheStreet.com, which says that American Home and IndyMac are set to accept American Express for a mortgage payment. Talk about piling debt on top of debt:

American Express is “trying to get into recurring payments” by encouraging card members to charge things such as gas bills and rent, says Sanjay Sakhrani, an analyst at Keefe Bruyette & Woods.

“That assists their spending volume and also provides rewards to consumers and makes their card product more attractive,” says Sakhrani. “My sense is that over time these partnerships should expand and should go to other card lenders as well.”

Anyone concerned about the fact that nearly anyone with a heartbeat can get a credit card?

I’m not sure this program will benefit anyone, frankly. Consumers unable to afford their mortgage on a cash basis can pay that debt — say it’s at 6 percent — by assuming additional debt, say at a more variable 12 percent. I don’t see consumers that can pay cash for their mortgage choosing to trade up to a higher interest rate, can you?

Not surprisingly, this isn’t a subprime payment plan — it’s only for affluent, prime borrowers:

Allowing customers to place mortgage payments on their credit card “certainly increases the credit risk or the severity risk, but remember they’re [lending] to the affluent consumer,” Sakhrani says. “This consumer has a pre-existing credit line already. It certainly is scary, but you have to trust that they’re issuing cards to higher-quality consumers, which I do.” He rates the stock outperform.

American Express says it has several protections in place. Besides offering the program to only existing card members and those with prime loans, American Express will also continue to monitor customers and re-authorize them each month on the ability to use the program, the spokeswoman says.

“These are highly responsible, highly creditworthy consumers who are driven by rewards and convenience,” she says.

Personally, I don’t see how American Express is comfortable taking on what is essentially an unsecured debt position in a cardholder’s mortgage.