Credit Crunch Could Chew Up Lenders

Cauldron and Fire

So which companies could feel the effect of worse credit numbers in 2003? Well, some already sickly ones could feel more pain, like credit card lender Capital One (COF). It's highly unlikely that Sears' (S) card portfolio will recover in 2003, given the large amount of subprime credit car loans it has made.

In the auto loan sector, AmeriCredit(ACF), already a casualty of the subprime bust, will continue to sputter into 2003 as past-due loans rise. And due to hair-raisingly widespread use of heavily incentivized loans, the credit arms of Ford(F) and General Motors(GM) could experience bad loan problems in 2003.

When it comes to the housing sector, it's harder to pinpoint which lenders could get hit by a housing market downturn. Anyone doing subprime mortgages is at risk, however. Particularly exposed in this scenario is mortgage insurer MGIC Investment(MTG), which has already had problems with delinquencies this year.

Among mainstream banks, Citigroup (C) and Washington Mutual (WM) make subprime mortgages. It would take quite a downturn to hurt borrowers with good credit -- and very few economists are expecting a recession in 2003.

But the growth in the prime-borrower sector has been so strong that a handful of lenders could get hurt even without a grinding slowdown in the economy. Especially vulnerable could be those focusing on markets where house prices are inflated, like the Northeast and some areas in California. Indeed, Wells Fargo(WFC), adored on Wall Street, has considerable exposure to heady Western house prices and has a fair-sized subprime mortgage book, too.

Finally, what's the outlook for Fannie Mae(FNM) and Freddie Mac(FRE), the two government-coddled institutions that buy billions of dollars worth of home loans every year and provide enormous support to home prices? Freddie's comparative conservatism should mean it will have an uneventful 2003. However, margins at Fannie, the bigger of the two, could be crimped by recent aggressive hedging policies that had to be entered into because the lender was too exposed to a drop in interest rates. Signs that Fannie is running an overly risky book could depress its stock price and invite scrutiny on Capitol Hill. If that happens, expect it to slow the breakneck speed at which it has been expanding its loan book.

The credit crunch is far from over.

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