As the world's largest economy grapples with the worst housing slump in two decades, people with good credit histories are falling behind on house payments, auto loans and credit cards at an accelerating pace.
The problem, spurred by a sharp decline in home prices and a clampdown on loans by banks, poses a new a threat to the housing market and weakening economy, which some specialists say is in a recession or headed for one.
The Bush administration, scrambling to keep the U.S. economy from skidding too sharply, on Tuesday released a plan to help qualified homeowners in distress hang on to their homes.
The initiative was announced as Warren Buffett, the billionaire investor, offered to reinsure the municipal bond portfolios of three troubled bond guarantors, a move that, together with the Bush plan, bouyed Wall Street investors searching for any good news about the troubled mortgage market.
But Buffett's offer, already rejected by one of the companies, would do little to alleviate the problems they are facing on the guarantees they have made to investors who hold securities backed by mortgages, consumer loans and other assets. (Page 11)
Until recently, people with prime credit histories, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against strains posed to the U.S. economy by rising defaults among borrowers with blemished, or subprime, credit.
"This collapse in housing value is sucking in all borrowers," said Mark Zandi, chief economist at Moody's Economy.com.
Like subprime mortgages, many prime loans made in recent years allowed borrowers to pay less initially and face higher adjustable payments a few years later. As long as home prices were rising, borrowers on these terms could refinance their loans or sell their properties to pay off their mortgages.
Although the rise in prime delinquencies is less severe than the one in the subprime market, with prices falling and lenders clamping down, homeowners with solid credit are starting to come under the same financial stress as those with subprime credit.
"Subprime was a symptom of the problem," said James Keegan, a bond portfolio manager at American Century Investments, a mutual fund company. "The problem was, we had a debt or credit bubble."
The bursting of that bubble has led to steep losses across the financial industry. American International Group said Monday that auditors found it might have understated losses on complex financial instruments linked to mortgages and corporate loans.
The turmoil is also stirring fears that some hedge funds may run into trouble.
At the end of September, nearly 4 percent of prime mortgages were past due or in foreclosure, according to the Mortgage Bankers Association. That was the highest rate since the group started tracking prime and subprime mortgages separately in 1998.
The delinquency and foreclosure rate for all mortgages, 7.3 percent, is higher than at any time since the group started tracking that data in 1979, largely as a result of the surge in subprime lending during the past few years.
Personal bankruptcy filings, which fell significantly after a 2005 law made it harder to wipe out debts in bankruptcy, are also starting to inch up.
An example of the spreading credit crisis is Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in northern California to take cash out to pay for his daughter's college tuition.
Doyle, 52, is now worried that he will have to file for bankruptcy because he cannot afford to make the higher, variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.
During the past few years, his mortgage rate rose as high as 7.5 percent, up from an original 3.8 percent, but he managed to negotiate it down to 5.6 percent, where it is now. That new rate, however, is set to rise in the next few months.
"The whole plan was to get out" before his rate reset, he said. "Now, I am caught. I can't sell my house. I'm having a hard time refinancing. I've avoided bankruptcy for months, trying to pull this out of my savings."
The program announced Tuesday by the Bush administration, crafted by six of the largest U.S. lenders, would offer both prime and subprime borrowers who are more than three months behind with their payments the chance to halt foreclosure proceedings for 30 days and work out new loan terms.
Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo will contact homeowners who are 90 or more days overdue on monthly mortgage payments to work out a way to make the mortgage more affordable.
In a conference call with analysts in December, Kenneth Lewis, the chief executive of Bank of America, said more borrowers appeared to be giving up on their homes as prices fell, noting a "change in social attitudes toward default."
The default rate for prime mortgages is still far lower than for subprime loans, about 24 percent of which are delinquent or in foreclosure. Some economists note that slightly more than a third of American homeowners have paid off their mortgages completely. This group is generally more affluent and contributes more to consumer spending and the economy relative to its size.
Unlike subprime borrowers, who tend to have lower incomes and fewer assets, prime borrowers have greater means to restructure their debts if they lose their jobs or encounter other financial challenges. The recent reductions in short-term interest rates by the Federal Reserve should also help by reducing the reset rate for adjustable-rate loans.
Economists say the rate cuts and the stimulus package are unlikely to make a significant dent in Americans' large debts, because banks have tightened lending standards, and expected rebates from the government will not cover most house payments.
