Growing loan losses to hamper US economy -Moody's

NEW YORK, July 23 (Reuters) - 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 so tight."

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 Chester, Pennsylvania.

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.