U.S. housing misery poised to enter new phase

By Herbert Lash - Analysis

NEW YORK (Reuters) - Signs that home prices may have bottomed have stirred hope on Wall Street that the economy is on the mend, yet tight credit and a new foreclosure wave cast doubt on any looming housing revival.

Sales of previously owned U.S. homes rose for a second straight month in May, realty data on Tuesday showed, while the U.S. government and Federal Reserve have designed a number of programs to alleviate a battered housing market.

However, the chief economist of the National Association of Realtors warned of the danger of a "delayed" recovery in housing, with prices down 32 percent nationwide from their peak three years ago.

Big risk factors that could spur more foreclosures include expectations of rising unemployment and the forecast resetting of interest rates on 2.8 million subprime and Alt-A mortgages in the next two years.

Delinquency rates on mortgage payments typically rise in tandem with unemployment, which is expected to top 10 percent after hitting a 25-year high of 9.4 percent in May. And when mortgages interest rates reset, they are typically at higher rates that can cause monthly payments to balloon.

"I'm worried that the investment community is a little too sanguine about how much of the housing pain is behind us and that we might be in the all-clear," said Ronald Temple, co-director of research at Lazard Asset Management in New York.

Against this backdrop comes continuing tightness in housing credit. According to Amherst Securities Group LP, a severe lack of credit outside of government-sponsored mortgages has reduced loans, especially for the purchase of new homes, and is putting further downward pressure on prices.

Authorities are aware of the hurdles housing poses to economic recovery. The U.S. government is trying to stabilize housing by offering incentives for lenders to favorably modify the terms of delinquent mortgages. And the Federal Reserve has pledged to buy as much as $1.25 trillion in mortgage-backed securities to free up funding for new home loans.

FORECLOSURES HITTING THE MORE CREDIT-WORTHY

One in eight U.S. households at the end of March had entered foreclosure or was delinquent on payments, the Mortgage Bankers Association (MBA) said last month.

The number of homes in foreclosure in the first quarter jumped to a record 3.85 percent of outstanding U.S. mortgages, MBA said.

The bulk of recent foreclosures was on prime, fixed-rate loans, extended to the most credit-worthy borrowers and the bedrock of home ownership in America.

The first wave of foreclosures had been mostly on subprime loans offered to the riskiest borrowers.

The foreclosure rate is getting worse and will likely rise to about 4.5 percent, said Patrick Newport, an economist at IHS in Lexington, Massachusetts who closely follows housing.

"What's driving people to leave their homes is a combination of having their house under water and then losing their job," Newport said. "Under water," or negative equity, refers to when the market value of a home is less than the mortgage.