NEW YORK, July 23 A weak U.S. economy will
likely struggle into 2009, as more borrowers default on their
debt, posing a growing burden on the financial system, Moody's
Economy.com said in a report on Wednesday.
The household debt problem and fallout from the global
credit crunch could result in nearly $1 trillion in losses for
the financial industry, according to the report.
"Overleveraged households are at the heart of the economy's
problems," Moody's Economy.com analysts wrote in the report.
"The economy will sputter as long as credit conditions remain
The combined effect of the housing slump and credit squeeze
will wipe out $5 trillion in household wealth, said the
research firm, a unit of Moody's Analytics, based in West
Cumulative losses on mortgages and consumer loans made
through 2007 could reach $525 billion, as loan defaults have
risen sharply in recent months, the report said.
First mortgage defaults will likely hit an annualized 3
million in 2008, triple the rate two years ago, it said.
At the end of June, first mortgage defaults were an
annualized 2.72 million, up from 1.5 million in 2007 and 1.0
million in 2006.
Mortgage conditions will likely deteriorate further for the
rest of the decade, with about 5 million homeowners at
"significant" risk of default during this period, the Moody's
Economy.com analysts said.
Falling home values is a critical factor that will push
these homeowners to default on their mortgages.
The firm forecasts home prices will fall by another 10
percent, bringing the peak-to-trough decline in prices to
roughly 25 percent.
Adding to consumers' struggle is a worsening job market.
The unemployment rate could hit 6.5 percent in the third
quarter of 2009, a full percentage point higher than the
current level, the analysts said.
Households' debt woes will reverberate across the financial
system, Moody's Economy.com said.
Of the estimated half trillion dollar in consumer credit
losses, $350 billion will be borne by banks and savings
institutions, $150 billion by insurance companies and pension
funds, and the remaining $100 billion by hedge funds and other
investors, Moody's economists said.
So far, financial companies have announced nearly $325
billion of write-downs and private institutions are estimated
to have lost $100 billion.
Moody's analysts predicted another $100 billion in consumer
loan losses will be announced in the coming quarters.
Painting an even bleaker picture for the financial sector,
Moody's Economy.com said there is another $400 billion in
losses on real estate assets like construction and land
development loans or losses on corporate credits which have yet
to be recognized.
(Reporting by Richard Leong; Editing by Leslie Adler)