... credit crunch coming?

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    Credit crunch coming?

    Card delinquencies have hit a record; the housing slowdown could mean more pain is coming.

    January 7, 2004: 1:09 PM EST
    by Mark Gongloff, CNN/Money Staff Writer

    NEW YORK (CNN/Money) - The record percentage of consumers behind on their credit-card payments could be the ugly result of a weakening housing market -- and an ominous sign of greater credit pain to come, economists said Wednesday. But some analysts suggested that the improving labor market would ease the sting of a softer housing market and help stop the bleeding in consumer balance sheets.

    The American Bankers Association (ABA) reported Tuesday that 4.09 percent of all credit-card accounts were delinquent in the third quarter, the highest rate on record, and said the weak job market was probably to blame.

    But Morgan Stanley senior economist Bill Sullivan suggested there may be another culprit -- the end of the mortgage refinancing boom. "It is no coincidence that households found it more difficult to maintain current payment schedules just as the volume of refinancing activity began to dry up as the second half of the calendar year got underway," Sullivan wrote in a research note Wednesday.

    The refinancing boom, triggered as mortgage rates fell to the lowest level in a generation, offered homeowners a ready source of cash. Most consumers plowed that cash back into their houses, for new washers and dryers, carpeting or to build that new deck.

    But others used it simply to pay bills, including their credit-card bills. Shut off the refi spigot, and you may have shut off the ability of some cardholders to pay. "Conceivably, as the number of households that refinanced dropped off, the ability for consumers to enhance cash flows and service other debt loads eroded as well, thus partially accounting for the upturn in late payments," Sullivan wrote.

    How flush consumers are has big implications for the United States, since consumer spending fuels more than two-thirds of the economy. The housing market helped keep consumers spending despite a recession, rising unemployment, terror attacks, two wars and the three-year bear market in stocks.

    Since the refi boom peaked in May, the average rate on the thirty-year, fixed-rate mortgage has risen, but only by 0.6 percentage points, and is still well below 6 percent -- a historically low level. Despite such a small gain in rates, however, many new mortgage borrowers have jumped to adjustable-rate mortgages (ARMs) -- possibly a sign that many of the borrowers during the housing boom had less-than-perfect credit.

    "In our judgment, this pattern could be another exhibition of household balance sheet stress, as the shift would seem to suggest that a relatively small rise in 30-year rates apparently excludes a significant number of prospective home buyers from qualifying for mortgage credit," Sullivan wrote.

    ARMs can sometimes be easier to get, but their monthly payments can jump after the first year, and those payments could rise further as interest rates rise -- another way the expected rise in rates and slowdown in the housing market could pinch consumers' wallets this year.

    A housing slowdown could also lead to more mortgage foreclosures, according to Robert Brusca, chief economist at Native American Securities in New York. "Foreclosures have been running low nationally because home prices have been up -- anybody who couldn't pay their mortgage could simply sell their house and pay off the mortgage balance with their equity," Brusca said. "If you don't have any equity, you can't forestall foreclosure."

    Brusca said the end of the refi boom doesn't totally explain the jump in credit-card delinquencies in the third quarter, but he called tying the two issues together "the right thing to do."

    "Should housing get into trouble, it could expose debt problems," he said.

    ABA senior economist Keith Leggett acknowledged that the end of the refi boom had cut off one source of cash for consumers to pay off credit cards, exposing them to lingering weakness in the labor market. Since the last recession officially ended in November 2001, employers have cut 800,000 more jobs, and about 2.3 million jobs have been lost since February 2001, just before the recession began -- the longest such stretch of labor weakness in the United States since World War II.

    But the job market has shown signs of life in recent months, and many economists hope that improvement will gather strength this year. If it does, said the ABA's Leggett, consumers will be able to bear the brunt of any housing slowdown -- eventually.

    "Even if there's a pick-up today in job creation, we should not see a real improvement in delinquencies until later this year, as there's about a 6- to 9-month lag," Leggett said. "But I clearly believe the employment market plays a key factor in delinquencies."



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