Containment spreading fast in housing bust: James Saft

By James Saft

LONDON (Reuters) - Every day more loans to more Americans with all sorts of credit profiles, secured on all sorts of housing, are going bad, and every day the chances of a recession rise.

From the beginning, Fed officials and others have preached "containment" on the housing debacle: first that its effects would be confined to subprime borrowers, then to locations, such as California, and finally that the damage would not spread too far within the economy.

But like a nightmare version of the movie Spartacus, now even the most unlikely borrowers are standing up and telling their lenders: "I am subprime".

Wachovia Corp WB.N, for example, last week reported disappointing earnings and set aside $408 million against bad loans, nearly quadruple the year ago figure.

"It's interesting to note here that problems in these markets, really for all lenders, seem to be across the board without regard to originating FICO, the type of loan or the condition of the property," Wachovia chief risk officer Donald Truslow told analysts on a conference call. FICO is a credit scoring system widely used to gauge risk in lending to individuals.

A close look at the latest loan delinquency figures from FirstAmerican LoanPerformance bears this out.

The figures, which are only through July before the worst of the housing credit crunch hit, show that late payments, a red flag for eventual defaults, are rising across the board. What's worse, delinquencies are accelerating faster in some "safer" segments than they are in the subprime sector, which caters for those with poor credit histories.

A total of 18.82 percent of subprime loans were delinquent in July, 29 percent more than in April. But while only 4.52 percent of loans to Alt-A borrowers, the class just above subprime in creditworthiness, were behind on payments in July, that represents a huge 45 percent increase since April.

Prime jumbo loans, those to borrowers with good histories wanting a loan of more than $417,000, are going bad at much smaller but faster accelerating pace, standing at 0.6 percent, up more than 50 percent since April and at the highest since March 1999.

Prime conforming loans, which meet standards laid down by mortgage giants Fannie Mae and Freddie Mac, show a 1.37 percent delinquency rate in July, up 20 percent since April.

While all of this is bad news for banks, as we have seen in the recent run of results and the sell-off in shares, it is worse for the economy.

With inventories of houses for sale high, and repossessions rising, these figures are more likely to get worse, and worsen faster, than get better.

CONSUMERS THE NEXT LEG?

A number of questions are raised by the data. How many of the late payers have been hit by a worsening economy, and how much will the economy be worsened by their behavior and by the knock-on effects of weakening housing and financial sectors?

Morgan Stanley's Stephen Roach sees the risks as higher than during the dotcom downturn, noting that U.S. consumption, at 72 percent of GDP, is five times what capital spending, which drove the dotcom expansion, was seven years ago.