Mark Zandi, the chief economist for Moody's Economy.com, wrote a good synopsis in an editorial today of the potential broader implications of the problems in housing and mortgages. Here are some excerpts:
Some 2.5 million homeowners -- 5 percent of all mortgage holders -- are expected to default on their mortgage loans this year and next. This is a record percentage that will mean a whopping $400 billion worth of defaults and $100 billion in losses to investors in mortgage securities. The fallout will hit nearly all of us.
First, home values will sink. Loans will be tougher to get, meaning fewer families will qualify for mortgages. Foreclosure sales will put more properties on the market at steep discounts. Less housing demand and more supply add up to lower prices.
Homeowners will find it more difficult to tap the equity in their homes for cash via home-equity loans or cash-out refinancing. Such lending is already fading quickly.
On the other side of the coin are investors who chose the riskier flavors of the new mortgage securities and now face big losses. If that sounds like someone else's problem, think again. Lots of pension plans that manage the savings of millions of ordinary workers and retirees have invested in hedge funds in recent years. Many of those funds are exposed to the mortgage market.
. . .
Finally, policy makers should prepare for the possibility that the fallout will undermine the stability of the global financial system and thus the broader economy.