Mortgage Woes to Worsen in ‘08, Experts Believe

Problems with delinquent mortgages are likely to worsen through this year and well into 2008, a new housing market study predicts.

Homeowners falling behind on their home loan payments 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.

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, an 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.

Rather, it projected 1.2 million first mortgage defaults in 2007 and 1.3 million more defaults in 2008. That compares to “just” 800,000 home loan defaults nationally 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 may be bigger in some markets.

In San Diego, he forecast a 14 percent decline in housing prices from their peak in early 2006. The firm expects prices to hit bottom by the middle of next year, with median prices returning to levels seen in mid-2004.

The study offered a mixed prediction for California mortgage credit quality in San Diego. As with the rest of the nation, defaults are expected to get worse for the rest of the year and into 2008.

But Economy.com also believes San Diego’s housing downturn began earlier than the rest of the nation’s, so the region’s credit quality problems should begin to stabilize sooner.

“The early fall in house prices has allowed some to already adjust spending and borrowing habits in line with the shifting value of their assets,” the report said.

Risky bad credit home loans, which are more likely to default, do make up a larger percentage of mortgages in San Diego County - 23 percent in 2005 -than the national average of 19 percent.

But the study also noted that subprime’s share of the local mortgage market has been relatively steady. For example, bad credit mortgages made up 26 percent of local home loans in 2002.

San Diego’s housing also was too expensive for many speculators, the study said, so the supply of homes dumped by investors is likely to be smaller here than in some other parts of the country.

Investors accounted for just 12 percent of San Diego mortgage originations in 2005, below the 16 percent U.S. rate, research shows.

Finally, despite recent weakness in the the job market, the report said San Diego’s long-term employment forecast is good. Because the housing market softened early, housing-related companies already have shed jobs.

Therefore, the region is part way through a layoff cycle linked the housing market downturn. Stable employment among tech and defense companies, plus rising employment in tourism industries.

Any hiccup in hiring, however, could derail the study’s forecast for a local recovery in the Southern California housing market.

“Should employment continue to fall through this year, it would disrupt the expected early improvement of both the housing and credit cycles,” the study said.

The findings are based on consumer credit files from credit bureau Equifax and cover more than 200 metropolitan areas in the U.S.

Declining credit will lead to big losses for investors in mortgage backed securities. Zandi predicted $113 billion in losses to investors - mostly hedge funds - from bad mortgage loans.

SOURCE: San Diego Union-Tribune