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The Debt-Ometers
How to Read the Subprime and Other Consumer-Loan Dials
By SUDEEP REDDY and CONOR DOUGHERTY
August 3, 2007

The downturn of the subprime-mortgage market is drawing attention to sometimes-overlooked gauges on the economy’s dashboard: those that track consumers falling behind on loan payments.

The rise in delinquencies — generally defined as loans 30 days or more past due — so far appears mostly in mortgages granted to subprime, or less-creditworthy, borrowers.

SUBPRIME FALLOUT

But economic forecasters, investors and the Federal Reserve are watching closely to see whether delinquencies are spreading.

“If you see sharp deterioration in bank card or credit-card delinquency rates, it suggests that consumers are beginning to buckle under the pressure of high energy prices and weakening housing markets,” says Ryan Sweet, an economist at Moody’s Economy.com. That would cast a shadow over the economy, given the import of consumer spending.

Here’s some of what delinquency measures compiled by the Federal Reserve Board, the Mortgage Bankers Association and American Bankers Association trade groups and by private number-crunchers show today:

Widely publicized delinquencies in subprime mortgages are concentrated in variable-rate mortgages, which account for about two-thirds of the subprime mortgages outstanding. Delinquencies on fixed-rate, subprime loans are relatively stable. But, delinquency rates on prime, variable-rate mortgages also are inching up, a particular worry as rates on cheap adjustable-rate mortgages climb.

In a switch from past behavior, some consumers are falling behind on mortgages while staying current on credit-card payments. It used to be the opposite.

The number of credit-card loans in delinquency has been running at about 4% of the total for the past six years; levels of 3% were common in the 1990s, according to the American Bankers Association. But the percentage has been moving lower recently.

Here are what the major gauges show and how they work:

Mortgages: Subprime, Prime
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The Mortgage Bankers Association’s quarterly readings on mortgage delinquencies are among the most closely followed, though some economists say that the association may miss some smaller subprime lenders, and that the picture could look better than it really is. Numbers typically are released more than two months after a quarter ends.

Mortgages matter because they represent about four-fifths of U.S. consumers’ $12.8 trillion in total debt. About one in six subprime variable-rate mortgages were delinquent in the first quarter.

Delinquencies are also up among fixed-rate subprime mortgages, although the problem is less acute: One in 10 loans is delinquent.

Delinquencies are far less common among borrowers with better credit ratings, as about 3.7% of those with variable-rate loans were delinquent in the first quarter. But that is up from 2.3% a year ago, and there are concerns the trend might continue to deteriorate as some of those borrowers confront higher monthly payments when mortgage rates rise or teaser rates expire or when refinancing becomes unattractive because of home prices.

Among these prime borrowers, delinquencies remain a low 2.2%, by the Mortgage Bankers Association’s measure.

More detailed, and current, data on mortgage delinquencies come from First American Loan Performance of San Francisco, which collects data from mortgage servicers. Released 30 to 45 days after month’s end, the LoanPerformance data cover about 85% of prime mortgages and 50% of subprime loans. Bob Visini, the company’s vice president of marketing, says the Mortgage Bankers Association and top private providers generally show similar trends.

Cards, Autos, Home Equity

The Fed, drawing from data supplied by banks, reports its own delinquency rates for residential loans, including mortgages and home-equity lines of credit, 60 days after a quarter ends. But Fed data don’t distinguish between variable and fixed-rate mortgages, so the Fed used LoanPerformance data in its recent semiannual report to Congress to make the point that mortgage delinquency problems are, so far, concentrated in subprime, variable-rate mortgages.

Although consumer borrowing other than mortgages accounts for only about a fifth of consumer debt, this credit plays a significant role in the pace of consumer spending. The broadest readings on delinquencies are issued quarterly by the Fed 60 days after a quarter ends. The Fed’s data on credit cards show the amount of delinquent debt has hovered around about 4% over the past few years with no obvious rise lately.
[Riskier ‘Dealers’ Loans]

The American Bankers Association publishes more-detailed consumer data two months after the end of a quarter. Its latest figures show delinquency rates on direct auto loans — those made by banks — at 1.68%, a 12-year low, a contrast to the mortgage market.

But the delinquency rate on loans made through auto dealers is at 2.73%, a 10-year high. That suggests the people with poorer credit, who are more likely to get car loans from dealers than from banks, are facing more trouble making payments.

The share of delinquent home-equity loans was 2.15% in this year’s first quarter, a bit lower than in 2004 but well above the 1% pace of 2000, ABA figures show. Hints of trouble ahead are appearing. Countrywide Financial Corp., for instance, recently said 4.6% of its prime home-equity loans were delinquent in the second quarter, up from 1.8% a year earlier. Individual lenders release company-specific data, often in Securities and Exchange Commission filings or earnings reports, which can offer early warnings of industry trends.

Some private firms also predict delinquency trends, including CreditForecast.com, a joint service of Equifax Inc. and Moody’s Economy.com that relies on Equifax’s consumer-credit data. It provides information on local markets to help lenders and investors pinpoint problems.

The latest data show delinquencies for mortgages and consumer borrowing outside of credit cards rising in the second quarter. Its measure of delinquencies for credit cards and cars have remained fairly steady over the past year.

Mortgages vs. Credit Cards
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In the past, consumers tended to make mortgage payments a priority, falling behind on credit cards first. That may be changing. In the first quarter of 2007, 3.73% of mortgages, in dollar terms, were delinquent, and credit-card delinquencies were 3.82%, according to Equifax and Economy.com. In contrast, after the 2001 recession, delinquencies on mortgages were 2.52% nationally versus 5.39% for credit cards.

Economists offer several possible explanations. The shift “may be related to the fact that we’ve got people who have mortgages for the first time, or they have different kinds of mortgages,” said Robert Hunt, a Federal Reserve Bank of Philadelphia economist. “So, the shock hit them before they understood what’s going on.”

Or it may be that homeowners who have very little equity in their homes have little to lose by letting the mortgage company take the house. Elizabeth Warren, a Harvard law professor who studies bankruptcy, says mortgages have gone from something anyone would pay, “to a debt that has soared out of sight, causing more families simply to give up.”

Write to Sudeep Reddy at sudeep.reddy @ wsj.com and Conor Dougherty at conor.dougherty @ wsj.com

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