More Problems for Banks Seen Looming on the Horizon

June 28, 2008 - The first cycle in the credit crisis may have past however it appears the crisis is far from over and another cycle may be looming and gaining momentum as the economy weakens and defaults spread into new categories of loans.  While mortgage loans have been the overriding theme of loan delinquencies in the initial phase of the cycle’s crisis, the next phase seems to be expanding into areas concerning other forms of consumer debt.  As the downturn has filtered throughout the economy, many types of consumer debts are now being impacted.  Delinquent payments on home equity loans (also known as home equity lines of credit or HELOCs) are now reportedly at record highs as well as rapidly growing delinquency rates on auto loans, constructions loans and even business loans are now feeling the pinch.  Many categories of loans are reaching delinquency rates not seen in over a decade.  Regional banks may represent the types of local institutions which are most at risk in this next phase of the credit crisis as they tend to be a major source of loans for communities and businesses as well as being a strong player in extending personal consumer loans.  The concern is that these smaller, regional institutions will have fewer options if and when the need arises to raise funds as quickly as has the bigger institutions are able to do.   

In the previous six months, almost $7 billion in home-equity loan payments fell into default, reaching an overall delinquency rate of around 2 ¼ % and growing by 45%.  Not surprisingly, almost appearing in tandem, delinquency rates in almost every other consumer loan category also grew in the first quarter as well.  Now reaching the highest level since the early 1990’s, auto loans have a delinquency rate of over 3%.  Businesses are also feeling the impact of the country’s debt hangover as construction and development loans have topped 7% in their rate of delinquent payments at the end of the first quarter, hitting a level not seen in almost 15 years.  So while the meltdown in sub-prime mortgage-backed securities may have ignited the crisis at the inception, the developing problems within the broader economy, sparked by the escalating costs for fuel and other commodities, have expanded the crisis to the point now where it is far from over.  

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