Borrowers stretched to the limit

In 24 years as president and chief executive officer of Sacramento's Safe Credit Union, Henry Wirz said he's never seen such "widespread credit problems in the Sacramento region."

It began last September with rising delinquencies on car loans. By December, the late payments spread to real estate loans. Now, increasingly, borrowers have maxed out their credit cards and home equity lines of credit, said Wirz, sitting in his office on Madison Avenue.

What's to blame? Rising unemployment is one factor, he said. Another is borrowers' desperate efforts to make the house payment and then deal with their other bills.

Safe Credit Union has counted just five foreclosures so far among its 1,846 mortgages and 4,073 home equity lines of credit, Wirz said. But as chief of the 130,000-member institution with 85,000 loans and a near $1 billion portfolio, Wirz said he's never seen so many borrowers so near the end of their ropes. And the problems, he said, appear worst in newer neighborhoods.

Last week, Wirz talked about a credit crisis he believes is still in early stages. Here are excerpts.

Q: You've been here since 1984 and seen all the cycles, up and down, good and bad. And this is the worst credit problem you've ever seen in Sacramento?

A: The reason I say that is this is touching not just the people who have traditionally always been a problem, which is people who have lower credit scores. In every crisis, when we first have a downturn, it's the people at the bottom of the economic pyramid who seem to experience the worst outcomes.

I think what surprised us was in this downturn we're seeing people who had, at the outset, relatively good credit having negative outcomes.

Like most lenders we use the Fair Isaac credit scoring system, the FICO score. In this downturn, where we analyzed the folks having problems, we saw a disproportionate number of people in that 680 to 719 credit score. And those are people who generally don't have a lot of credit problems. They tend to do pretty well. We give them the benefit of better rates and fairly liberal credit because they have a history of repaying their obligations. That was a real surprise in this credit cycle.

Q: You've said you saw the problem start in September with auto loan delinquencies. What explains what you're seeing?

A: It makes sense in retrospect. You kind of prioritize your obligations. You do that. I do that. I think, for a lot of people, the most important thing was to hang onto their house. This is primarily a problem of people having too many bills and not enough income to cover them. So they began juggling their bills. Credit cards, auto loans, things like that took second place to keeping the mortgage payment up.

I think that's why we started seeing it in auto loans. We've seen it in credit cards, and now most recently, we've seen it in real estate loans. People have done everything possible. We've seen a lot of the credit cards and home equity lines get fully utilized as people have drawn them down to support their monthly expenses.

I think we're now at the end of that rope. There just isn't any more credit card balance available. There isn't any home equity available, and now people are having to confront the ultimate problem, which is how do I keep my house? How do I keep my mortgage intact? I think that's why we're seeing people coming in.

Unfortunately, for all of us, the members and for us, we'd have been better off had they contacted us earlier in the process. There's more we can do earlier in the process than we can do at the last instance of them being out of all other alternatives.

Q: You say we're at the front end of this credit crisis? How long might this continue?

A: In almost every kind of lending problem it takes 18 to 24 months to work through it. I hope this one is a problem we can work through that quick. I've heard some others say it might not be.

One of the problems in this is for every one of these people who ends up going through a foreclosure, or ends up going through one of these programs, it's a significant hit to their credit. That can take up to seven years on their credit report to go away. It's going to impair an awful lot of people for an long period of time.

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