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Economist's Outlook for Credit Quality Is Dire

Mark Zandi, one of the nation's most prominent housing economists, is predicting that mortgage credit quality "will erode measurably" between now and next summer.

And if that isn't pessimistic enough, he also says that there is a relatively low, but rising, risk that a global financial shock could lead to further damage.

Speaking on a conference call with reporters last week, Mr. Zandi predicted that the U.S. mortgage market will see slightly more than 1.2 million mortgage defaults in 2007. He predicts the industry will see 1.3 million defaults in 2008. By contrast, Moody's Economy.com estimates that the industry saw about 800,000 defaults in 2005.

Those coming defaults will lead to about $125 billion in losses for investors in mortgage securities, he said, noting that his estimate is more pessimistic than Federal Reserve Board Chairman Ben Bernanke's. Recently, Mr. Bernanke made headlines by predicting that the subprime mortgage crisis could cause $50 billion to $100 billion in losses.

Mr. Zandi said the principal reason that he believes the mortgage credit decline has at least another year to run its course is that housing prices are not expected to recover anytime soon. He believes that nationally, home prices will decline 10% from their peak to their trough, with some markets seeing much more dramatic falls. He said he does not expect home prices overall to reach their trough until the second half of 2008.

Areas that are vulnerable to more dramatic deterioration in home prices include California, Florida, Arizona, Nevada and parts of the Northeast and the industrial Midwest, he said.

And unlike some other economists, Mr. Zandi says the broader economy may not be able to shoulder the weight of the housing downturn without feeling some pain.

"I do think all of this implies a substantial impact on the broader economy," he said. He thinks the housing downturn may push unemployment up slightly, negatively affect consumer spending and trim economic growth by about a quarter of a percentage point this year and next.

"While the economy will bend, I don't think it will break. I don't think there will be a recession," Mr. Zandi said.

But he also sees rising risk of a global economic shock that causes further deterioration in mortgage credit quality and more significant damage to the economy.

The collapse of another subprime mortgage hedge fund is one scenario that could precipitate a crisis of confidence and plunge the market into such a global crisis, he said.

"Until very recently, investors were seemingly very nonchalant with regard to risk in almost every global asset," Mr. Zandi said. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.bondbuyer.com/ http://www.sourcemedia.com/

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