NEW YORK (AP) - The malaise in the mortgage market is starting to spread to credit-card and auto loans in what one analyst has dubbed consumer credit "contagion." It's an ominous warning signal for the economy.

Many of the nation's big banks and credit-card companies have begun acknowledging that they are seeing a shift in consumer behavior, including more people unable pay off their debts.

Things are unraveling faster than expected for some like Capital One Financial Corp., which on Tuesday boosted its estimates for credit losses next year to potentially above $5 billion in part because of elevated delinquencies on its cards.

No one is calling this problem the next debt-related land mine yet, but it is still important to watch what happens, especially as the holiday shopping season gets under way.

Much attention has been paid in recent months to the collapse in housing prices and the upheaval in the mortgage market. The initial trigger was people with shaky credit - known as subprime borrowers - increasingly defaulting on their home loans.

An added complication was that many Americans used their homes as piggy banks in recent years. When debt was cheap and easy to get and the value of their homes was surging, they borrowed against them. People used part of that cash to pay off other debts, but mostly to fuel a spending surge on everything from flat-screen TVs to new cars to vacation homes.

That party seems to be over. Morgan Stanley analyst Betsey Graseck warns that an oncoming consumer credit "contagion" could be ahead, and uses that as the basis to downgrade her ratings on large banks to "cautious" - the lowest rating at Morgan Stanley has on industries. Among those on her watch list: Citigroup, Bank of America and Wells Fargo.

She says there is already evidence that subprime mortgage implosion is affecting other areas, given that banks have tightened their lending to consumers. She expects more stringent lending standards to put the squeeze on consumers at the same time unemployment rates are rising and housing values are falling.

In recent weeks, many banks and card issuers have boosted what is known as loan-loss reserves. Under accounting rules, they are required to estimate the amount of loans that won't be collected, and should that increase, they must set aside more money to cover those loans. Higher loan-loss reserves equal lower earnings.

"Firms that are now adding to the portfolio might have had a few whiffs of trouble brewing earlier this year, and dragged their feet in adding to reserves because they were hoping that interest rate cuts might bail them out and give borrowers breathing room," said Jack Ciesielski, who writes the industry newsletter The Analyst's Accounting Observer.

"Now the odor is getting stronger, and it looks like adding reserves is the only course of action they can follow without presenting misleading financials," he said.

When Citigroup announced its quarterly earnings last month, it noted two "behavioral patterns" that could be correlated with future delinquencies and losses on its credit cards. The bank said that it had seen evidence of cardholders increasing the balance on their cards or some for the first time are using the card to take cash advances.

CFO Gary Crittenden, during a conference call with analysts, said such evidence contributed to the company's decision to take a charge totaling $1.30 billion to increase its loan-reserves for U.S. cards during the quarter ended Sept. 30. That compared with a reserve release of $197 million in the same period a year ago.

Capital One, when announcing its third-quarter results on Oct. 18, cited higher delinquency rates in its credit card and auto loan divisions, and said in both areas it had boosted provisions for uncollectable debts. It had estimated total 2008 credit losses for its entire loan portfolio would be around $4.9 billion.

Then on Tuesday, the McLean, Va.-based company said more difficult times were likely ahead. It raised its range of credit losses to as high as the mid-$5 billion mark. Its chief risk officer, Peter Schnall, said during an investor conference that card delinquencies in the fourth quarter are "unlikely" to decline the way the company had assumed. He said the company, in its revised range, now assumes the economy in 2008 will continue to be sluggish.

Loans for credit cards, auto financing and other debt are often sliced up and sold as securities on global debt markets. Mortgages are securitized that way, too. And as has been evident in recent months, surging defaults in mortgage portfolios have knocked down the value of those assets, creating a ripple effect as securities have had to be repriced at much lower values.

These new consumer worries could just spell more trouble for financial companies, as Morgan Stanley's Graseck noted last week in her banking industry downgrade.

Financial stocks have accounted for 342 points to the downside in the Dow Jones industrial average this year, and are the only sector dragging down the index. Without them, the Dow would be 2.5 percent higher than it is now, according to Bespoke Investment Group.

So much for this year's credit turmoil resolving itself soon. Now it seems to be feeding on itself.

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

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