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Credit crisis spreading far beyond sub-prime loans

Repayments on prime mortgages, credit cards and car loans also affected

(NEW YORK) The credit crisis is no longer just a sub-prime mortgage problem.

As US home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their house payments, car loans and credit cards at a quickening pace, according to industry data and economists.

The rise in prime delinquencies, while less severe than the one in the sub-prime market, nonetheless poses a threat to the battered housing market and weakening US economy, which some specialists say is in a recession or headed for one. Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or sub-prime, credit.

‘This collapse in housing value is sucking in all borrowers,’ said Mark Zandi, chief economist at Moody’s Economy.com.

Like sub-prime mortgages, many prime loans made in recent years allowed borrowers to pay less initially and face higher adjustable payments a few years later. As long as home prices were rising, these borrowers could refinance their loans or sell their properties to pay off their mortgages. But now, with prices falling and lenders clamping down, homeowners with solid credit are starting to come under the same financial stress as those with sub-prime credit.

‘Sub-prime was a symptom of the problem,’ said James Keegan, a bond portfolio manager at American Century Investments, a mutual fund company. ‘The problem was we had a debt or credit bubble.’ The bursting of that bubble has led to steep losses across the financial industry.

American International Group said on Monday that auditors found that it may have understated losses on complex financial instruments linked to mortgages and corporate loans.

The turmoil is also stirring fears that some hedge funds may run into trouble. At the end of September, nearly 4 per cent of prime mortgages were past due or in foreclosure, according to the Mortgage Bankers Association. That was the highest rate since the group started tracking prime and sub-prime mortgages separately in 1998. The delinquency and foreclosure rate for all mortgages, 7.3 per cent, is higher than at any time since the group started tracking that data in 1979, largely as a result of the surge in sub-prime lending during the last few years.

The default rate for prime mortgages is still far lower than for sub-prime loans, about 24 per cent of which are delinquent or in foreclosure. Some economists note that slightly more than a third of American homeowners have paid off their mortgages completely. This group is generally more affluent and contributes more to consumer spending and the economy relative to its size.

Unlike sub-prime borrowers, who tend to have lower incomes and fewer assets, prime borrowers have greater means to restructure their debts if they lose jobs or encounter other financial challenges.

 

Source: NYT, AP (Business Times 13 Feb 08

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