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Foreclosure News

Study Warns of Negative Mortgage Cycle

Moody's Economy.com projects foreclosures to peak in 2011 for last year's subprime ARMs

July 26, 2007

By MortgageDaily.com staff

Mortgage delinquency will peak next summer, according to a new study that also projects foreclosures on variable-rate subprime loans made late last year won't peak for at least four years -- when one-in-five of these loans are expected to be in foreclosure. The report warned of a negative mortgage cycle that could spin out of control.

Delinquency will climb to 3.6 percent by the summer of 2008, Moody's Economy.com announced today. The level represents the highest delinquency will reach.

The study was reportedly based on consumer credit files from Equifax in 200 metropolitan areas.

Of the 2.5 million first mortgages expected to default over the next two years, problems will be most pronounced in the Central Valley of California and metropolitan areas of Las Vegas, Phoenix, Washington and New York, Moody's said. Florida, where more than 20 percent of workers are employed in housing-related industries, will be hit especially hard by deteriorating mortgage quality.

The report projects foreclosures on one in 10 subprime adjustable-rate mortgages by next summer. Already, 4 percent of subprime ARMs are in foreclosure. The prior peak was reached shortly after Sept. 11, 2001, when the foreclosure rate reached 6 percent.

Foreclosures on just subprime ARMs originated late last year won't peak, however, until 2011 -- when they will reach 20 percent, Moody's reported.

"The economic fallout from the devolving mortgage market will be substantial, but conditions would be even worse if not for a continued generally sturdy job market," said Moody's Economy.com Chief Economist Mark Zandi in the statement -- adding that an "unprecedented glut of supply will weigh on house prices for some time."

A negative mortgage market cycle could develop, Zandi continued. Rising delinquency could force lenders to further tighten underwriting guidelines; tighter guidelines will reduce the pool of potential borrowers; fewer buyers could push home prices lower; and lower prices will hurt borrowers that need to refinance.

"There is a substantial risk that the mortgage market will devolve into a self-reinforcing negative cycle," the economist said. "The cycle repeats with more intensity and the mortgage market corrections unravel into a crash."

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