Another year of slump likely

The national housing slump likely will drag on for another year, leading to more mortgage defaults and perhaps billions of dollars in losses for Wall Street investors, a West Chester economic-consulting firm forecast yesterday.

The outlook on eroding credit quality in the U.S. mortgage market by Moody's Economy.com anticipates that more than 1.2 million first-mortgage loans will default this year and an additional 1.3 million will follow next year.

That compares with about 900,000 defaults last year and about 800,000 in 2005, Mark Zandi, the Web site's chief economist, said in a conference call.

Hedge fund investors who own mortgage securities will lose from $100 billion to $125 billion as a result, he said.

"We do expect losses in the subprime market to be very severe," Zandi said. Subprime refers to borrowers with poor credit histories.

The mortgage industry already has seen a surge in defaults and anticipates an upswell in coming months as many adjustable mortgages begin to reset to higher interest rates.

A decline in housing prices is driving the rise in defaults, as many financially strapped homeowners are unable to sell their home or refinance before missing payments.

Zandi said the regions of the country that would exhibit the most defaults would be California, particularly the central region of the state, Las Vegas, Florida, and areas around New York and Washington.

While delinquencies have occurred nationwide, the Northwest has weathered the problem better than other regions, Zandi said.

He said he expected the housing slump to last at least another year, with home sales bottoming out later this year and construction activity hitting a low in the first half of 2008.

Subprime loans account for the biggest slice of defaults. But borrowers with all types of loans, including Alt-A and prime loans, which are typically accessible only to the most creditworthy borrowers, are also defaulting.