March 2 (Bloomberg) -- Billionaire Warren Buffett said the worst financial crisis in 70 years is dragging down highly rated companies because they pay more to borrow than wounded firms whose losses have U.S. government guarantees.

“At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one,” the chief executive officer of Berkshire Hathaway Inc. wrote in his annual letter to investors. “Though Berkshire’s credit is pristine -- we are one of only seven AAA corporations in the country -- our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing.”

The U.S. recession, now in its second year, began with borrowers falling behind on loan payments, leading to losses in mortgage-backed securities. Home-loan borrowers fell behind on their monthly payments at a rate of 4.2 percent in January, according to Bloomberg data, while mobile-home residents who borrowed from Berkshire Hathaway’s Clayton Homes Inc., even with a median credit score just 4 percent higher than subprime, were late at a rate of 3.6 percent last year, Buffett said.

Clayton Homes, based in Maryville, Tennessee, went back to basics in its mortgage underwriting, Buffett wrote. The company avoided low “teaser” interest rates while borrowers didn’t assume that home prices would continue rising, he wrote.

Now they are “threatened” by government policy, which determines “haves” and “have-nots,” and not the performance of their loan customers, Buffett wrote.

Jimmy Stewart

Subprime mortgages were available to borrowers with bad or incomplete credit histories and typically had credit scores below 620. Buffett said his borrowers have median credit scores of about 644.

“Jimmy Stewart would have loved these folks,” Buffett wrote, referring to George Bailey, the small-town savings-and- loan banker Stewart played in the 1947 film, “It’s a Wonderful Life.”

U.S. foreclosure filings have topped a quarter-million for 10 straight months, according to RealtyTrac Inc., and an estimated one in six U.S. borrowers now owe more on their mortgages than their houses are worth, online real estate data provider Zillow.com said.

The problems could have been avoided if lenders had learned from lax mortgage underwriting in the mobile-home industry during the 1990s, Buffett said.

Canary in the Mine

“At that time, much of the industry employed sales practices that were atrocious,” Buffett wrote. “This 1997-2000 fiasco should have served as a canary-in-the-coal-mine warning for the far larger conventional housing market. But investors, government and rating agencies learned exactly nothing from the manufactured-home debacle.”

Home prices have fallen every month since January 2007 and declined a record 18.5 percent in February, according to the S&P/Case-Shiller Home Price Index. The Obama administration has pledged to spend $275 billion to bolster the housing market, including $75 billion to bring down mortgage rates and encourage loan modifications.

“The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future,” Buffett wrote. “Home purchases should involve an honest-to-God down payment of at least 10 percent and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.

“Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.”

To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net.

Last Updated: March 2, 2009 16:45 EST