These are the ostrich people who thought if they ignored it, it would just go away. Still buying the big LCD TVs, still going on nice vacations, sti
September 4, 2009

These are the ostrich people who thought if they ignored it, it would just go away. Still buying the big LCD TVs, still going on nice vacations, still pretending it's all going to be okay. Well, it isn't.

Now that it's been a while and the jobs aren't coming back, those people are now getting hit with the reality stick - and because they carry the bulk of credit debt, the banks are going to be in even worse shape than they already are:

The long recession and rising joblessness are taking an increasing toll on the nation's most credit-worthy borrowers, who are now falling behind on their mortgage and credit-card payments at a faster pace than people with poor financial histories.

The mortgage-delinquency rate among so-called subprime borrowers reached 25% in the first quarter but appears to be leveling off, rising only slightly in the second quarter. The pace of delinquencies for prime borrowers is accelerating. Since prime loans account for 80% of U.S. bank exposure to mortgages and credit cards, these losses could ultimately exceed those from weaker borrowers.

"The subprime pain is in the rearview mirror," says Sanjiv Das, head of Citigroup Inc.'s mortgage business, which is seeing delinquencies rise among prime borrowers, who make up three-quarters of its mortgage portfolio.

In many cases, these "prime" customers, whose high credit scores afforded them the best interest rates on mortgages and credit cards, lost their jobs over the past few months and only now are running out of temporary fixes that have been keeping them afloat.

The trend signals more bad news for U.S. banks. Rising delinquencies on prime mortgages helped drive the total mortgage-delinquency rate to a record 9.24% in the second quarter, according to the Mortgage Bankers Association. The data reflect loans at least one payment past-due.

[...] About 40% of the strapped consumers seeking help from the OnTrack Financial Education & Counseling center in Asheville, N.C., are prime borrowers, up from 15% last year, says Tom Luzon, director of counseling services at the United Way agency. Many of these clients already scaled back their lifestyles after losing their jobs or seeing their salaries slashed. Some are small-business owners whose companies foundered as a result of the recession.

"They have made adjustments and made adjustments, but then you get to a point where you can't adjust anymore," says Mr. Luzon, who is a former banker.

"People who are middle-class wage earners initially may have severance pay and think they have plenty of time to find a job, but then they start using credit cards to support living expenses," he says.

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