Credit contagion infects your wallet

By Jim Jubak

My worst nightmare about the collapse of the subprime-mortgage market is coming true.

The horrors let loose among mortgage borrowers and lenders by falling housing prices have begun to sink their fangs into the market for auto loans and credit cards, too. We're inching dangerously close to the point where consumers run for the hills -- taking their wallets and prospects for economic growth in the United States with them.

In a wave of earnings reports that started with Citigroup (C, news, msgs) on Oct. 15, big banks reported a torrent of ink as red as blood from their mortgage operations.

The damage came from two directions: mortgage delinquencies and assets backed by mortgages. At Citigroup, for example, delinquencies soared in September. The percentage of first mortgages more than 90 days past due climbed that month to 2.09% from 1.29% a year earlier, and second-mortgage delinquency rates doubled from earlier in 2007. And losses from Citigroup's investments backed by mortgages climbed to $1.56 billion for the quarter. That was well above the $1.3 billion loss the company had pre-announced just weeks earlier.

The damage was similar at other big banks:

• Washington Mutual (WM, news, msgs) reported a net loss of $222 million from selling mortgage loans that it didn't want to hold in its own portfolio. That was a big switch from the $192 million gain on sale in the second quarter. Nonperforming mortgage assets increased to 1.65% at the end of the quarter, up from 1.29% at the end of the second quarter.

• At Bank of America (BAC, news, msgs), the quarter saw a $527 million loss from structured debt products including mortgages and a doubling in nonperforming assets to $3.4 billion.

• Wachovia (WB, news, msgs) reported a $587 million increase in non-performing residential real-estate loans and a $127 million increase in residential mortgage foreclosures.

• At Wells Fargo (WFC, news, msgs), net credit losses rose to $892 million from $663 million in the third quarter of 2006.

Altogether, U.S. banks raised their reserves against loan losses by $6 billion in the third quarter from reserve levels at the end of the second quarter of 2007.

That's bad news for bank stocks, certainly. Every dollar that goes into reserves is a dollar less that can be lent out to make money. And the levels of reserves don't look likely to fall in the near future. Washington Mutual, for example, told Wall Street analysts that it expects that charge-offs in its mortgage portfolio will increase by 20% to 40% in the fourth quarter.

It's more than mortgages

But the really scary news for the general economy is that the banks' problems aren't limited to mortgages and the housing market. They're starting to see rising delinquencies and charge-offs in their portfolios of auto loans and credit card debt.

Wells Fargo, for example, said that charge-offs on its credit card portfolio rose to $176 million from $161 million in the second quarter. At Washington Mutual, managed credit card delinquencies climbed to 5.73% of the bank's portfolio from 5.11% in the second quarter.

But the most stunning news -- and the most troubling indicator that credit problems aren't limited to the mortgage market anymore -- came from the credit card companies. Because these lenders have neither direct nor indirect exposure to the mortgage market, the trends here are an indicator of what's happening with consumer credit outside mortgages. And the news in the third quarter wasn't good.

For example, American Express (AXP, news, msgs), in its Oct. 22 third-quarter earnings report, put aside an additional $196 million in the third quarter, a 44% jump from the end of the second quarter, for loan losses in its credit card portfolio. The company's total provision for loan losses climbed 25% in the quarter to $982 million. Outstanding loans climbed 23% for the quarter, trailing both the percentage increases in credit card and total loan-loss provision.

At Capital One Financial (COF, news, msgs), credit card charge-offs climbed to 4.13% and delinquencies to 4.46% in the third quarter. The company increased its loan-loss provision in its auto-loan business by 34% from the second quarter. Total loan-loss provision climbed 32% from the third quarter of 2006 and 28% from the second quarter of 2007.

Continued: Other explanations for these numbers

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