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Growing loan losses to hamper US economy -Moody's
July 23, 2008 / 5:31 PM / 9 years ago

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.

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.

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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)

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