Federal intervention in failure of Fannie Mae and Freddie Mac won't save everyone

NEW YORK — The government doesn't want Fannie Mae or Freddie Mac to go broke, but it better start thinking about what happens if the rest of us do.

The latest data on the job market paints an ugly picture: The unemployment rate shot to a five-year high in August and payrolls are being cut at an alarming rate.

With more people out of work, that likely means many are having a tougher time paying their bills. If that leads to a surge in defaults on debt assets beyond just mortgages — like credit cards, auto loans and more — we can forget about the credit crisis being over any time soon.

That's something to remember amid all the news regarding the Treasury Department's live-saving takeover of Fannie and Freddie. The mortgage giants, which own or guarantee about half of the nation's home loans totaling around $5 trillion, have been ailing for months as mortgage default rates have soared and their capital base has been constrained.

The plan, which calls for the government to inject up to $100 billion in each of the U.S.-sponsored mortgage financiers to keep them operating, has been lauded on Wall Street as a turning point in stabilizing the housing market and buoying the overall economy.

But the bailout announced Sunday can't be viewed as a cure-all for the nation's credit woes. The government is trying to prevent further deterioration in the mortgage market, but it hasn't done much to ease other credit troubles.

"There is no silver bullet here. This is certainly a positive step, but is not the absolute answer," said Mark Zandi, chief economist at Moody's Economy.com. "They've made progress in residential mortgage assets but have yet to deal with other problematic loans."

What's worrisome is whether growing stress in other areas of credit leads to more big losses and write-downs at banks and other financial institutions in the months ahead.

Of particular concern is what happens with the more than $2 trillion in consumer debt. That may be only a fraction of the more than $12 trillion in residential mortgage loans, according to Zandi, but it still is mighty large — comparable to all the goods and services produced by France in 2007.

Americans this year have been increasingly using their credit cards to make purchases. Banks have tightened lending standards on such things has home equity loans, which were heavily relied on in recent years to finance consumer spending. New data released Monday by the Federal Reserve show that consumer borrowing on credit cards grew at an annual rate of 4.8 percent in July, up from a growth rate of 3.5 percent in June.

But as credit-card use has surged, payments on those cards have fallen — even though $106.7 billion flowed into American's wallets in recent months from the U.S. economic stimulus package. Card payment rates fell 6.2 percent on a year-over-year basis in July, the ninth consecutive monthly decline. That's the second biggest pullback in the records kept by the banking analysts at Oppenheimer & Co., behind March's year-over-year decline of 7.4 percent.

And the situation for consumers seems to be getting worse, at least given the weak jobs data — which some economists say is indicative of a recession.

According to the Labor Department, the jobless rate rose from 5.7 percent in July to 6.1 percent in August, and employers cut their payrolls by 84,000 in August, the eighth straight month of declines. That pullback was fueled by employers' worries about the economy and their own business prospects.

So far this year, 605,000 jobs have vanished. The economy needs to generate more than 100,000 new jobs a month for employment to remain stable.

"Rising joblessness of the magnitude we saw in the August employment report means that more households, including good quality prime borrowers with solid credit histories, will likely be encountering more difficulties meeting their debt obligations," said David Rosenberg, chief North American economist at Merrill Lynch.

Research by Merrill's economics team found that there is a very tight historical link between the unemployment rate and consumer credit card delinquencies. "So even with this dramatic support just unveiled for the mortgage market, we anticipate the next phase of the credit crunch will be in the form of lenders being forced to revise up their consumer credit loss estimates once they start to more fully take into account a deteriorating employment backdrop," Rosenberg said.

The losses might not even begin to intensify until 2009, since there is a lag between when someone is out of work and when loan defaults begin.

So while the U.S. government focuses its attention on the mortgage mess, another storm is brewing. And like everything else related to this credit crisis, don't count on a quick fix.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck@ap.org