More financial land mines ahead

The worst of subprime mortgage crisis may now be out in the open. But more problems are lurking in prime mortgages, credit cards and auto loans.

By Chris Isidore, senior writer

NEW YORK ( -- When Lehman Brothers reported a stunning $2.8 billion loss Monday, it was just the latest sign that bad mortgage loans continue to be a problem for the financial markets and the economy.

But subprime mortgages could only be the beginning. Many economists and market experts are worried that other problems are lurking that could cause a new credit crisis for consumers and businesses.

Meredith Whitney, the banking analyst for Oppenheimer & Co., estimates that the credit problems will continue to dog financial markets into 2009. She thinks future losses will dwarf the roughly $25 billion set aside by Wall Street firms so far to cover them -- perhaps reaching $170 billion by next year.

Other experts agree that the worst is not yet over.

There are several types of loans raising concerns, ranging from prime mortgage loans to credit cards. Much like subprime mortgages, many of these loans were packaged into securities traded on Wall Street. And many of these loans are beginning to see rising defaults and delinquencies, just as subprime mortgages were a year ago.

These defaults are nowhere near subprime loan levels and few think they will ever get that bad. But if defaults keep rising, this can cause the same kind of problems in the markets for those securities, leading to widespread losses for investors.

"There are plenty of additional problems on bank balance sheets," said Kevin Giddis, head of fixed income sales, trading and research for investment bank Morgan Keegan. "The bigger problem is we don't know how far it goes. Those problems remain well hidden for a reason."

But if they do eventually surface, it would mean higher costs and tighter credit for consumers. And that in turn could lead to an even longer slump for the economy than currently forecast.

Prime loans "the next shoe" to drop
Giddis worries most about prime mortgage loans, those made to borrowers with good credit histories.

A survey from the Mortgage Bankers Association showed that at the end of the first quarter, nearly 2% of prime loans were either 90 days or more past due, or already in foreclosure. That's more than twice the rate from a year ago, an even bigger spike than the jump in subprime delinquencies during that period.

"We've pretty much gone to the wall on subprime," said Giddis. "The problem that is going to face financial institutions now is the good borrower. It's the other shoe to drop."

Jay Brinkman, the MBA's vice president for research and economics, said the problem for prime loans isn't as much bad loans being made but a weakening economy causing job losses for borrowers. Making matters worse, many homeowners find it tough to sell because of a record drop in home values.

This unprecedented drop in home values is therefore likely to lead to record prime loan foreclosures, losses that were never forecast when the mortgages were written and then sold to Wall Street.

Will wheels come off of auto loans?
Prime mortgages aren't the only part of the credit market showing early signs of rising problems. Auto loan defaults are also increasing steadily, according to figures from the American Bankers Association.

The delinquencies on the most prevalent type of car loan rose to 3.13% at the end of the fourth quarter of last year, according to the ABA, the highest rate since 1990. Delinquencies were up 22% from a year earlier.

In addition, high gas prices have led to a continued decline in the resale value of many light trucks, such as SUVs and pickups. That's lead to a loan-to-value ratio of 94% for all autos in the most recent reading for April, up from 88% as recently as 2005.

John Silvia, chief economist with Wachovia, said this raises worries about consumers dumping vehicles they can no longer afford to drive in a period of $4 gas.

"If someone has a durable good that is inefficient, they're going to be more willing to walk away from it," he said.

Equity lines, credit card woes also rising
Credit cards and home equity line delinquencies are rising even faster than those of auto loans, according to the ABA figures. Nearly 1% of home equity lines of credit were delinquent in the fourth quarter, according to its report, up 68% from a year earlier. Delinquencies reached their highest level since 1991.

In addition, 4.5% of the money owed on credit cards was delinquent in the period, up from 3.54% a year earlier. James Chessen, ABA's chief economist, expects that delinquency rates for credit cards and home equity loans will continue to rise throughout the year.

"No relief for consumers is in sight as food and gas prices remain stubbornly high and income growth is anemic," Chessen said.

And while credit card delinquency rates are not high by historic standards, the Federal Reserve's most recent loan officer survey shows tighter credit standards for both those loans and home equity. That's a sign that lenders and investors are trying to back away from those markets as well, said Scott Hoyt, senior director of consumer economics at Moody's

Add all that up and it's just more bad news for consumers, and the economy that depends on their spending.

"This obviously impacts their ability to spend, their confidence, their ability to service their debt and it's going to continue even as the economy recovers," said Hoyt.


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