New Crisis Threatens Healthy Banks

"We're doing everything we can to stay in the house," said Chavez, 21. "We've been going through tough times, so we're trying to do as much as we can, even if it is killing us."

For lenders, there is little recourse when a home-equity loan defaults or a homeowner declares bankruptcy. They can seize the collateral for the loan, in this case the house, only after the primary mortgage is paid off.

From October to March, $6.7 billion in home-equity loans became delinquent, increasing the total by 45 percent, according to SNL Financial. The delinquency rate is now 2.24 percent, according to the FDIC, which began tracking the data in 1991.

Losses at banks are going up as a result. J.P. Morgan Chase absorbed $450 million of home-equity-loan losses in the first quarter, up from $248 million in the previous quarter. It said its total home-equity losses could double by the end of the year.

Smaller banks have even more exposure to such loans. Overwhelmingly, the institutions that hold the most home-equity loans are regional banks, such as SunTrust Banks and National City, according to Fitch Ratings.

Late payments and defaults in every other major category of consumer debt also rose in the first quarter, the American Bankers Association reported. Auto loans issued through car dealers have a delinquency rate of 3.13 percent, the highest since at least 1990, according the ABA.

"The rise in consumer credit delinquencies is consistent with a rapidly slowing economy," said James Chessen, the ABA's chief economist. "Stress in the housing market still dominates the story, but it's a broader tale of an overall weak economy."

Businesses are also feeling the pain of relying too much on credit. Construction and development loans, a specialty of regional and local banks, hit a delinquency rate of 7.18 percent at the end of March, the highest in 14 years, according to the FDIC. In October, the rate was 3.22 percent.

The trend worries regulators. "Right now, too many community bankers are having too hard a time coming to grips with the problems that have emerged in their commercial real estate portfolios," Comptroller of the Currency John C. Dugan said in a speech last month.

In the Washington area, home-equity and commercial real estate loans represent a significant share of the banking business, and the trouble in these two areas is a source of deep concern, said Peter Fitzgerald, a former U.S. senator from Illinois who founded Chain Bridge Bank in McLean.

"The banks around here all have an extraordinary concentration in real estate," said Fitzgerald, adding that his bank has followed conservative lending practices since opening in August. "And what will happen is you will have some economic Darwinism. The banks with the strongest balance sheet will not only survive but will go on to prosper."

Even the region's healthiest banks are anxious about the prospect of a prolonged recession.

"We are pretty upbeat right now; our guys are feeling really good," said Bernard H. Clineburg, chairman and chief executive of Cardinal Bank. The firm recorded a profit of $2 million in the first quarter, attributing the result to conservative lending policies. "But if people keep losing their jobs, at some point everyone is going to feel the pain," Clineburg said. "If it keeps going, I don't think anyone escapes."