Loan Delinquencies Spread to Other Forms of Consumer Credit

The economic downturn and home mortgage crisis is being felt in other areas of the banking industry, and the result may be a second wave of bank failures, this time in regional and local banks. In an article entitled, “New Crisis Threatens Healthy Banks,” the Washington Post reports that delinquencies are up in credit card payments (which had been previously reported), home equity loans, and—most strikingly—construction loans (see the Post graphic below). Many smaller banks that avoided the subprime mortgage market are, nonetheless, mainstays of the home equity and construction loan business in their areas. As a result, this spread of delinquencies may lead to problems for these smaller institutions.

Although we were not hearing anything about it at the time, this graph also shows that delinquencies in construction loans actually led the foreclosure crisis. The uptick in construction loan delinquencies appears to begin in mid-2006, which is before the current crisis began. In contrast, the consumer aspects of the crisis hit a year later in mid-2007, just as foreclosures began to soar. The graph below, which comes from econoday.com, shows that mortgage interest rates bottomed out in 2005 and and began to rise in late 2005 and early 2006. New home sales fell accordingly, and delinquencies in construction loans followed.

All of this dramatizes the powerful role of the real estate market in stimulating our current economic difficulties. Of course, once these real estate trends got the ball rolling, our sleeping problems with consumer debt (home equity loans & credit cards) just made matters worse. Much worse.