Home prices to fall on liquidity concerns: analyst

(Reuters) - The collapse of Lehman Brothers Holdings Inc LEH.N and takeover of Merrill Lynch & Co Inc MER.N will cause liquidity in the credit market to shrink, resulting in lower home prices, prominent U.S. banking analyst Meredith Whitney said.

The Oppenheimer & Co analyst also expects fewer mortgages to be available for prospective homeowners, as she sees no hope for the return of the mortgage securitization business.

"All this creates a recipe for meaningfully lower U.S. house prices," Whitney said.

The magnitude of houseprice declines in the next few years could likely exceed expectations of both the markets and the companies, she wrote in a note issued late Monday.

"The fact that all banks under our coverage have unrealistic HPA (housing price appreciation) assumptions will in our opinion lead to a material and protracted writedown and capital pressure scenario for banks well into 2009," Whitney said.

Since the onset of the credit crisis over 14 months ago, less than $100 billion worth of mortgages have been securitized and, accordingly, homeownership stands at 68 percent, Whitney said.

Similar to how the securitization market volumes have plummeted since the credit crisis hit, housing prices will likely go through a severe correction, the magnitude of which will be beyond that of market expectations, Whitney said.

She also said that banks under her coverage had significant, concentrated exposure to California and Florida through their loan portfolios, particularly in mortgage and home equity.

Bank of America Corp (BAC.N) and Wachovia Corp WB.N have the highest mortgage exposure, while Bank of America and Wells Fargo (WFC.N) have a big exposure to home equity in the states that have seen the greatest home price declines , the analyst said.

(Reporting by Neha Singh in Bangalore; Editing by Anil D'Silva)