Effects of sub-prime crisis endures and spreads to credit cards and car loans

22 October 2007
US housing figures are continuing to worsen, and the effects of the sub-prime mortgage crisis are showing themselves in other American markets such as credit cards, home equity lending and car loans, indicating that it’s not only high-risk mortgage borrowers that are suffering the storm.

US banks have raised their reserves in order to cover potential losses, as executives predict that borrowers will not be able to meet their repayments. US bank Wells Fargo has reported losses that went from $663 million last year to $892 million this year, and Wachovia – which has the fourth largest amount of assets in the US – has more than doubled its credit loss provisions to $408 million, compared to the second quarter of this year, as a result of home equity and car loan losses.

The credit crunch has had a far-reaching effect which is resulting in general credit worries on both sides of the pond. In the UK, mortgage borrowers are cutting back considerably on credit and savings in order to keep up with higher mortgage repayments as a result of five interest rises in 12 months and the recent credit squeeze.

According to research from Alliance & Leicester, Britons were saving just 2.1 per cent of their income in the first quarter of 2007 – an all-time low – and mortgage borrowers are feeling the effects a lot more than those living in rented accommodation, who are not cutting back on their credit but, consequentially, are spending more time worrying about their debts.

Sean Murphy, Director of Strategic Planning at Alliance & Leicester said: “Families are cutting back on their borrowing and their saving to help ensure they can afford higher mortgage and other household bills…Their family budgets have been under pressure and they have cut their cloth accordingly.”

Borrowing has continued to fall, as unsecured lending has been growing at its slowest pace on record this year, and credit card lending has fallen dramatically. Mortgage borrowers account for this to a large extent, as they are 50 per cent more likely than the general population to reduce their unsecured borrowings over the next six months, Alliance and Leicester found.

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