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A.M. Best Foresees Deterioration In Consumer Credit Fundamentals

Consumer credit may be poised to deteriorate as a confluence of rising interest rates and slowing home-price growth puts pressure on debtors, according to A.M. Best Co.

Noting that consumer and mortgage debt levels have risen considerably in recent years, the insurance rating firm noted that consumer loan growth slowed considerably late last year to 1.1% in the fourth quarter of 2005. That was down from a 3.8% growth rate in the fourth quarter of 2004. Residential mortgage debt grew at a 1.34% rate in the fourth quarter of last year, while home-equity loans actually contracted slightly.

The Federal Reserve Board raised short-term interest rates by 325 basis points between June 2004 and December 2005, and raised rates an additional 75 basis points between the end of 2005 and May 10.

And A.M. Best noted that most home-equity lines of credit have variable rates, pushing up consumer borrowing costs as rates rise.

The company also said that Federal Reserve Board data show a steady increase in mortgage delinquency rates throughout 2005. Because consumer loans represent 53% of total U.S. bank portfolios, the banking sector is vulnerable to a downturn.

Separately, Auriemma Consulting Group, Westbury, N.Y., predicted that consumer bankruptcy rates could trend upward, noting that a rush to file before the new bankruptcy law took effect late last year may have artificially depressed filings early in 2006.

In a news release, ACG managing associate Tom LaMagna questioned whether or not the new law will reduce bankruptcy volume, noting that a change in the law does nothing to alleviate the problems of insolvent debtors.

SNAPSHOT: Home-Equity Growth Slowing

2004 Bank HE Growth 42%

2005 Bank HE Growth 9%

SOURCE: A.M. Best Co. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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