Real Estate Property Investors Default On Home Loans (3)

On Aug. 17, in response to a credit crunch that grew out of problems
in the markets for mortgage-linked securities, the Fed reduced its
discount rate, the fee charged on direct Fed loans to banks, to 5.75%
from 6.25%, in an effort to boost confidence amid near panic among
investors over the surge in mortgage defaults and risks on other types
of loans.

Markets are betting the Fed eventually will have to cut the more
economically important federal-funds rate, charged on loans between
banks, the benchmark for short-term borrowing costs. Lower rates tend
to stimulate the economy by making it cheaper to borrow money.

Home prices are weak in most of the country largely because of a glut
of houses and condos on the market. In July, the number of homes
listed for sale nationwide was enough to last 9.6 months at the
current sales rate, according to the National Association of Realtors.
That's well above the five- to six-month supply that's considered
balanced.

Meanwhile, lenders keep setting tougher terms, particularly for
investors, who are viewed as higher-risk borrowers. Guidelines sent
out to mortgage brokers last week by Countrywide specified that
investors must make down payments of at least 20% on some types of
loans and must document their income and assets. During the boom, many
lenders provided 100% financing and often didn't insist on seeing the
borrower's tax forms and pay stubs.

Underscoring the growing pessimism about housing, economists at
Goldman Sachs in New York raised their forecast for the drop in U.S.
home prices this year to 7% from a previous 5%. The forecast is based
on the S&P/Case-Shiller national home-price index, considered the best
such gauge by some housing economists. The Goldman economists expect a
further 7% decline in house prices next year. In this year's second
quarter, the index was down 3.2% from a year earlier.

Another house-price index, produced by the Office of Federal Housing
Enterprise Oversight, or Ofheo, showed that prices in the second
quarter were up 3.2% from a year earlier, the federal regulator
announced yesterday. The Ofheo index, based on loans guaranteed by
Fannie Mae and Freddie Mac, excludes homes financed with mortgages
above the current $417,000 limit of the two federally sponsored
mortgage giants. As a result, it misses much of the market in
California and other high-price areas. The Ofheo index has lagged
other gauges in tracing the housing slump of the past two years.