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: Quote, Profile, Research, Stock Buzz), 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.