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‘Prime’ Borrowers Feel Sub-prime Pain
by
findingDulcinea Staff
America’s credit woes appear to be widening despite a Wall Street surge spurred by separate efforts from the U.S. government and Warren Buffett.
30-Second Summary
Although it started in the sub-prime market, the credit crisis is beginning to drag down people with good credit, as well. The number of prime loans in foreclosure is the highest in 10 years, according to findings reported by The New York Times.
This is bad news for the wider economy, as prime borrowers usually keep the economy afloat during downturns, the Times reports.
In the meantime, consumers at large are paying for sub-prime-related shortfalls. To offset their losses, banks have been charging higher interest rates on credit cards and tightening lending.
Compounding matters is investors’ continued mistrust of debt-backed securities, a trend that threatens “to deepen the financial system's wounds,” The Wall Street Journal writes. If the trend persists, banks will reduce lending, stifling economic activity.
World financial leaders’ projections complete the pessimistic picture: they expect sub-prime losses to reach $400 billion even though write-downs have already topped a record $100 billion.
A small ray of hope was offered by billionaire investor Warren Buffett, who offered to reinsure municipal bonds, and by a government plan to help troubled borrowers. Stocks rallied on the back of the news.
An upbeat voice is that of Smart Money columnist James B. Stewart who says that Americans should spend in such troubled times, not save. Not only because spending would be the patriotic thing to do, but also because both goods and stocks are cheaper.
This is bad news for the wider economy, as prime borrowers usually keep the economy afloat during downturns, the Times reports.
In the meantime, consumers at large are paying for sub-prime-related shortfalls. To offset their losses, banks have been charging higher interest rates on credit cards and tightening lending.
Compounding matters is investors’ continued mistrust of debt-backed securities, a trend that threatens “to deepen the financial system's wounds,” The Wall Street Journal writes. If the trend persists, banks will reduce lending, stifling economic activity.
World financial leaders’ projections complete the pessimistic picture: they expect sub-prime losses to reach $400 billion even though write-downs have already topped a record $100 billion.
A small ray of hope was offered by billionaire investor Warren Buffett, who offered to reinsure municipal bonds, and by a government plan to help troubled borrowers. Stocks rallied on the back of the news.
An upbeat voice is that of Smart Money columnist James B. Stewart who says that Americans should spend in such troubled times, not save. Not only because spending would be the patriotic thing to do, but also because both goods and stocks are cheaper.
Headline Links: The credit crisis spreads
The New York Times reports that credit market trouble is affecting people with good, or prime, credit. The number of prime loans in foreclosure is the highest in ten years.
Source: The New York Times
"A widening array of financial-market problems threatens to trigger a new phase in the global credit crunch, extending it beyond the risky mortgages that have cost banks and investors more than $100 billion in losses and helped push the U.S. economy toward recession," The Wall Street Journal writes.
Source: The Wall Street Journal
It has become cheaper for banks to borrow money, but they are raising interest rates for credit card holders in an effort to make up for sub-prime-related shortfalls.
Source: Los Angeles Times
Continued uncertainty about debt-backed securities may cause banks to reduce lending, which will further weaken the economy, according to findings reported by The Wall Street Journal. Analysts do not exclude a repeat of the turmoil caused by the collapse in the market for securities backed by sub-prime mortgages.
Source: The Wall Street Journal
Background: Sub-prime losses
G7 leaders fear sub-prime losses may rise to $400 billion, according to the Financial Times. The U.S. Federal Reserve had projected that the losses would not top $100–$150 billion.
Source: Financial Times
UBS is the latest big bank to announce large write-downs in sub-prime-related investment. With losses totaling $18.4 billion, the bank is one of the worst hit in the crisis that has cost financial giants over $130 billion.
Source: Reuters
Reaction: Buffett’s offer and the White House plan
Billionaire investor Warren Buffett has offered to back $800 billion worth of municipal bonds. The plan is to bail out beleaguered bond insurers who face downgrades. Further lowering of bond insurers’ ratings could aggravate financial market trouble. Buffett’s offer does not cover high-risk securities backed by sub-prime mortgages.
Source: Financial Times
A government plan gives some borrowers facing foreclosure 30 days to work out a better payment schedule, but does not oblige lenders to offer them one.
Source: The New York Times
Stocks rallied on news of Buffett’s offer and the government’s plan to aid borrowers. Financial stocks reported the biggest gains.
Source: Smart Money
Opinion: Spend, don’t hoard
SmartMoney columnist James B. Stewart says the designers of the stimulus package are onto something in urging people to spend their rebates. Likewise, Stewart urges his readers to buy, whether goods or stocks. “Spending rather than hoarding is a vote of confidence in the future. Collectively, it could give the economy a boost just when it needs it,” Stewart writes.
Source: Smart Money
Related Topics: A sub-prime miscellany
It is not just uninformed borrowers with poor credit who are suffering from the sub-prime crisis; the country’s financial giants have lost billions. In early January, findingDulcinea asked how the Wall Street mavens came unstuck.
Source: findingDulcinea
A total of 14 investment banks, loan providers and developers are under FBI scrutiny in the latest government crackdown related to the sub-prime mortgage crisis. findingDulcinea reported on the opening investigation in early February.
Source: findingDulcinea
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