That Sinking Feeling

Mark Zandi, chief economist at Moody's Economy.com, estimates that nine million U.S. homeowners currently owe more mortgage debt than their home is currently worth, and he thinks a lot of them will sink into default on their loans.

For that reason, Mr. Zandi recently told reporters that the number of foreclosures will likely continue to rise in the near term. Speaking at a news conference hosted by Demos, a liberal leaning research organization based in New York, Mr. Zandi said that in May some 2.75 million home loans were in default. That was three times higher than in 2005, the recent low point for defaults, and nearly double the level of loans in default during 2007.

Demos estimates that upwards of two million homes could be lost to foreclosure in 2008 and 2009. Already, Demos says that nearly 2.3 million homes, or 3% of the nation's housing stock, are vacant and on the market.

"The problem is not going away. It is likely to intensify for the remainder of this year and into next," Mr. Zandi said.

He said North Dakota is the only state that has not seen a significant increase in foreclosures.

The primary reason for rising foreclosures has evolved, Mr. Zandi said. In 2006, early payment defaults were the story. In 2007, rate resets on adjustable-rate mortgages drove up defaults. Now, negative equity is driving up defaults as consumers feel the effect of falling home values.

Adding to the pressure on loan performance today is rising unemployment, Mr. Zandi said, as lost jobs and lost hours are putting downward pressure on income for many households.

The confluence of all these trends is that three-quarters of metro areas are now seeing year-over-year declines in home prices, he said. And as long as homebuyers and financial markets don't see a light at the end of the tunnel, it will be difficult for housing values to stabilize and recover, he said.

That has Demos saying that current efforts to assist troubled borrowers are too narrow in scope.

"We think there is far more action that is needed by Congress and the administration to solve this crisis," Demos president Miles Rapoport said.

He said the foreclosure crisis is having a ripple effect on the entire economy. State and local governments, for instance, are likely to lose $90 billion in tax revenue due to foreclosures and falling home values this year, according to Demos.

Demos is calling for tighter regulation of mortgage origination practices. Mr. Rapoport said the spread of risky, nontraditional and subprime mortgage products represented a failure to provide effective oversight.

"This was a self-inflicted wound," he said. "This was a failure of deregulation."

James Lardner, a senior fellow at Demos, criticized lenders for qualifying borrowers at teaser rates, saying borrowers were given loans they couldn't afford. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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