US mortgage delinquencies to peak in '08-Economy.com

NEW YORK, July 26 (Reuters) - The credit quality of U.S. mortgages is set to weaken substantially through the remainder of 2007 and well into next year, with delinquencies peaking in mid-2008, Moody's Economy.com said on Thursday.

Delinquencies will peak at 3.6 percent of all mortgage debt outstanding in the summer of 2008, up from 2.9 percent in this year's first quarter, according to the study.

The findings are based on consumer credit files from the credit bureau Equifax and cover 200 metropolitan areas in the United States.

Moody's Economy.com said the subprime adjustable-rate mortgage, or ARM, segment will be the hardest hit, with the in-foreclosure rate forecast to hit 10 percent by mid-2008, up from the current 4 percent. For comparison, the previous peak of 6 percent was reached soon after the September 11, 2001, terrorist attacks, after which the rate fell to a low of 2.5 percent in the summer of 2005.

Subprime ARM loans originated in the fourth quarter of 2006 are expected to be the poorest performing loans, with the foreclosure rate peaking at just under 20 percent in the fall of 2011. This is more than three times the peak foreclosure rate that is forecast for loans originated in 2004.

"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 Mark Zandi, chief economist of Moody's Economy.com, in a press release.