Homes slump,mortgage turmoil slowing Calif. economy

A woman stands at the front of her home after negotiating the prepayment penalties down to get out of a bad mortgage, in San Diego, March 15, 2007. A ''significant slowing'' will grip California's economy this year as the subprime mortgage market's turbulence spreads amid a slow homes market, a UCLA Anderson Forecast report released on Monday said.

SAN FRANCISCO (Reuters) - A "significant slowing" will grip California's economy this year as the subprime mortgage market's turbulence spreads amid a slow homes market, a UCLA Anderson Forecast report released on Monday said.

The report projected the most populous U.S. state's economy will experience a "double whammy" of sharp drops in construction and mortgage financing activity crimping other business.

"Since the subprime market was almost the only thing keeping sales volumes buoyant in the last years of the boom, the drying up of subprime credit suggests that home sales in California will be stagnant for some time," the report added.

Subprime borrowers with patchy credit piled into the mortgage market in recent years, buying adjustable-rate loans that boosted homeownership rates across the United States.

The mortgages were especially popular in California because many consumers could not qualify for conventional home financing to afford the state's pricey housing.

Subprime mortgages accounted for 25 percent of securitized mortgage originations in California in 2005 and perhaps more in 2006, said Ryan Ratcliff, the economist who wrote the report.

"In 2005 and 2006 the only thing keeping the market going was that anybody could get a loan if they had a pulse," he told Reuters. "We have never seen so many people who qualified for loans without income to make payments."

SUBPRIME BILLS COME DUE

Low initial interest rates appealed to subprime borrowers desperate to buy a home but with little cash. But the rates have been resetting in recent months, swelling mortgage payments, straining finances and pushing default rates higher.

Lenders have been swamped by defaults by subprime borrowers, rattling financial markets and triggering concerns of a broader hit to the economy.

Many analysts suspect borrowers with better credit may also be burdened with ballooning payments after their adjustable-rate mortgages reset, which could add property to a housing market with a swollen inventory of homes for sale.

More homes for sale would force prices down amid weakening sales activity, further worrying homeowners.

At the same time, home builders and mortgage companies in California are seen cutting jobs amid slumping demand for housing and as tighter lending standards take hold in the wake of subprime woes, limiting qualified mortgage borrowers, Ratcliff said.

California's services firms continue to hire but that expansion is tiring, Ratcliff said: "Professional and business services will cushion the blow a little but that will run out of steam by the end of summer."

Ratcliff expects job growth in California to slow to below 1 percent through mid-2008 from 1.8 percent last year "It's no great shakes," he said. "Real estate-related sectors are going to be a drag on the rest of the economy."

No other sector appears poised to compound the drag so California will avoid recession, Ratcliff said, adding he does not see a major surge in foreclosures without pronounced job losses.