Mortgage woes likely to worsen into 2008

Problems with delinquent mortgages are likely to worsen through this year and well into 2008, according to a new study that predicts further pressure on an already reeling housing market.

Homeowners falling behind on their loans could peak at 3.6 percent of all mortgage debt nationwide by the summer of 2008, according to a study from Moody’s Economy.com, a consulting firm based in Pennsylvania. That’s up from 2.9 percent in the first quarter of 2007.

“U.S. mortgage credit quality will erode measurably through next summer,” said Mark Zandi, chief economist with Moody’s Economy.com. “I think credit problems will remain elevated into 2009.”

The consulting firm’s forecast didn’t predict a quick recovery. It projected 1.2 million first mortgage defaults in 2007 and another 1.3 million defaults in 2008. That compares with 800,000 defaults nationwide in 2005.

The erosion in credit quality stems in part from falling home prices, which Zandi said probably would decline further. He said prices wouldn’t bottom out until the second half of 2008.

Nationwide, the study forecast a 10 percent decline in home prices off their peak, though Zandi said declines would be bigger in some markets.

… Declining credit quality nationwide will lead to big losses for investors in mortgage backed securities, said Zandi, the lead economist for Moody’s Economy.com. He predicted $113 billion in losses to investors – mostly hedge funds – from bad mortgage loans.

Zandi’s forecast is more pessimistic than the one provided by Federal Reserve Chairman Ben Bernanke, who last week estimated losses of $50 billion to $100 billion.

SAN DIEGO UNION-TRIBUNE - Report: Mortgage woes likely to worsen into ‘08