NYT: Mortgage Crisis Spreads Past Subprime

On the heels of yesterday’s front page article in the Journal about widening credit woes, the NYT has a front page article of its own this morning noting that mortgage troubles aren’t limited to so-called subprime borrowers:

The credit crisis is no longer just a subprime mortgage problem.

As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto 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 subprime market, nonetheless poses a threat to the battered housing market and weakening 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 subprime, credit.

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

Like subprime 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 subprime credit.

Prime borrowers received Option ARM loans too. Plenty have elected to defer payments, allowing the loan balance to grow. Now they face the prospect of rates adjusting upward on mortgages that have GROWN for properties that have fallen in value. Naturally, many find themselves upside down on their homes and have an incentive to default and walk away.

Walking Away is especially bad for banks, which is why they plan to throw borrowers a “lifeline.“

And the problem isn’t limited to first mortgages of course. Default rates are rising for all sorts of consumer debt:

About 5.7 percent of home equity lines of credit were delinquent or in default at the end of last year, up from 4.5 percent a year earlier, according to Moody’s Economy.com and Equifax, the credit bureau.

About 7.1 percent of auto loans were in trouble, up from 6.1 percent. Personal bankruptcy filings, which fell significantly after a 2005 federal law made it harder to wipe out debts in bankruptcy, are starting to inch up.

On Monday, Fitch Ratings, the debt rating firm, reported that credit card companies wrote off 5.4 percent of their prime card balances in January, up from 4.3 percent a year ago. The so-called charge-off rate is still lower than before the 2005 law went into effect.

Is any of this really news? Not to anyone who’s been following the housing implosion over the last year. Falling prices affect overlevered homeowners of all kinds, regardless of credit rating.

What’s news is that the phenomenon is so wide-spread that national newspapers are making it the subject of page one articles above-the-fold.

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