Subprime woes just beginning for many

A foreclosed house for sale in Los Angeles.

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KAI RYSSDAL:


STEVE TRIPOLI: If you track this mess from household to neighborhood to nation you'll understand why every day it's looking like more than a passing storm. Let's start with a homeowner.

"BRUCE": We're going down to the second floor, and I made a half-glass floor so you can see through to the bottom of the building ...

"Bruce" doesn't want his last name used. His debt woes are tied up in court. But he's proud to show off all the work he's put into his Boston row-house over 21 years.

"BRUCE": Plus each floor has a deck ... It's a beautiful place to live.

His trouble started with a period of missed work. Bruce needed money to pay his bills so last year he refinanced his mortgage. He describes the deal haltingly, his head in his hands. Stress is eating him up.

"BRUCE": I just needed to get the loan, so my creditors wouldn't be on top of me.

A giant nationwide lender was happy to refinance the house -- no income documentation required. (Bruce asks us to omit the firm's name.) The broker was friendly, and Bruce assumed the company's size meant he was in good hands.

"BRUCE": I didn't read very much about the loan, 'cause I'm assuming it's gonna be a good loan.

That was a big mistake. Bruce soon had a subprime, interest-only, adjustable-rate mortgage with rapid payment adjustments. Before he knew it, a monthly payment around $1,500 had nearly doubled. At $2,800 it was way beyond what he could afford.

"BRUCE": That's impossible. I can't get close to that.

Bruce visited a financial counselor recently. He says he only learned then that the loan application he'd signed had grossly overstated his income. So now the house is dropping in value, leaving no more equity to tap. And Bruce has been leaning on a stack of credit cards to keep up with the mortgage. But they're all maxed out.

"BRUCE": And it was just ... the well ran dry.

Leaving him in foreclosure and bankruptcy. Now, multiply that kind of distress by a few million households and you get a sense of what a large slice of America's experiencing these days. Up in northern New England I spoke with Dave Deziel at Vermont and New Hampshire's Consumer Credit Counseling Service. He says loads of the agency's clients with mortgage trouble are heading down Bruce's path.

DAVE DEZIEL: They are increasingly using their credit cards to pay for daily living expenses. You know, using that as a way to free up cash flow so to speak, to be able to make the mortgage payment.

TRIPOLI: Is that working for them?

DEZIEL: No.

Don't forget a big slice of credit-card debt carries subprime interest rates, too. It's not for nothing that the term "debt spiral" sounds a lot like "death spiral."

Deziel says his clients are simply out of wiggle room.

DEZIEL: What we're finding is that people are stretched so much to the limit, the rubber band is stretched as far as it'll go. So any kind of, sort of bump in the road begins an avalanche of trouble it's really hard to get out of.

What's next for households? Well, we learned this month that auto- and student-loan delinquencies are also rising fast.

The whole mess is also weighing on Wall Street and the broader economy. On the credit card front we already know that companies from Citigroup to Capital One are expecting sharply higher delinquencies.
Dennis Moroney is at Tower Group, a research firm owned by MasterCard. He says lenders are padding cash reserves to meet rising defaults. But lately they're not doing it fast enough.

DENNIS MORONEY: So, what that suggests to me at least is that, if the rate of delinquencies is growing at a faster pace it would suggest there might be some potential risk for certain institutions going out into the future.

Mortgage lenders have already racked up tens of billions in losses. With credit-card and other lenders also bulking up loss reserves, they're sucking up cash the rest of the economy could use. Dennis Moroney sees danger in that direction too.

MORONEY: It could mean a further tightening of credit which means that the lending of different various products that drive the economy, 'cause we are a credit-driven economy, would be adversely affected.

Less credit, less growth -- a recession signal. So pick your poison. Consumers are carrying a staggering debt load. The finance world's groaning under its own debt problems. And working out of those woes might rattle markets, worsen a credit crunch, or both.

Most Americans seem to be riding out the crisis. But a large slice of America is struggling to stay afloat. And the next wave of this crisis is just starting to roll ashore.

I'm Steve Tripoli for Marketplace.

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