'CaliFlorida' the Nation's Barometer

As goes "CaliFlorida," so goes the nation's housing economy, according to the Mortgage Bankers Association.

That's because California and Florida, together, account for almost 19% of gross domestic product in the United States. Both states also led the nation's housing boom, with double-digit home price increases that lured homebuyers as well as investors to buy homes. High prices also fueled the popularity of loan products that helped stretch the buying power of consumers in those states.

With home prices now falling, many of those homebuyers are having trouble making payments on those loans or selling the homes to pay off their debt.

The pace of increase in foreclosures and delinquencies in those two states is driving national trend lines, according to Doug Duncan, chief economist of the MBA.

MBA research shows that California and Florida currently account for 42% of the nation's foreclosure starts for prime, adjustable-rate mortgage loans. For that to slow down, home prices will have to stabilize, Mr. Duncan told reporters on a conference call last week.

But California and Florida are not the only places where loan defaults are rising, he said, noting that states in the Upper Midwest also are experiencing elevated foreclosure activity.

"In those states, it is the economy that is driving the outlook," Mr. Duncan said.

Nationwide, the MBA projects that economic growth slowed to a rate of 1.1% in the fourth quarter, with declining "residential investment" dragging down the overall rate.

The MBA now predicts that home prices nationally will decline on average by about 8% nominally, or 12% in real terms, between the summer of 2007 and a trough later this year or in 2009.

Mr. Duncan said the inventory of homes for sale remains high and will take time for the market to absorb. In addition, he said current inventory data may be understated because many homes acquired through foreclosure are not marketed through traditional channels. The MBA predicts that slowing sales and declining prices will drive down loan origination volume by about 14% in 2008. Total lending volume may fall below $2 trillion for the first time since 2000.

Mr. Duncan said employment in the mortgage industry has fallen from a peak of about 505,000 to about 395,000 people today. "We expect to see another 25,000 or so layoffs within the industry throughout the rest of the year," Mr. Duncan said.

The MBA expects the nation's housing downturn to bottom out in the third quarter of this year, but Mr. Duncan said risks to that outlook "clearly are on the downside."

He also said the market has seen a dramatic shift in the type of firms serving the mortgage industry during the past 25 years, with large, diversified financial services firms replacing smaller, sometimes privately owned specialty firms. Of the top 25 lenders today, only ResCap is not part of a diversified financial services outfit, he said. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/