More Credit Crunch

More Credit Crunch

Two recent articles in Business Week and the New York Times indicate that subprime mortgage lending crisis is spilling over into other markets.

 

From the New York Times we find out that it is not just the subprime borrowers that are having a tough time but the prime borrowers with good credit. According to the article the collapse in housing prices is making it difficult for some prime borrowers to make their home loan, auto loan, and credit card payments. Delinquencies among prime borrowers are on the rise. In response banks are capping home equity lines of credit and are moving to reduce the credit card limits of customers they deem more risky. The credit tightening comes at a time when borrowers are looking to refinance due to the fall in housing prices. Increasingly borrowers are choosing to default on their home loans rather than work out a plan with the bank.

 

The article in Business Week tells a similar tale. As housing values fall and consumers find themselves unable to make payments, losses at the nation’s credit card companies are starting to mount. To stem the tide of red ink companies are hiking interest rates, reducing limits, and denying credit card applications. With home equity and credit cards no longer available homeowners are running out of options to pay their bills. Bankruptcy is less attractive due to the 2005 changes to the bankruptcy laws that made it much harder to wipe away credit card debt. Some are resorting to dipping into retirement accounts and seeking loans from payday lenders and pawnshops that charge much higher interest rates.