Expect Two More 'Waves' of U.S. Foreclosures, Economist Warns

While the U.S is currently in the midst of the largest bout of home foreclosures in at least 30 years, at least one economist says two more 'waves' are likely on the way.

Patrick Newport, a housing economist at Global Insight, said the next round of foreclosures could come over the next several months as a result of continued job losses in the U.S.

In addition to the nearly 660,000 U.S. jobs lost since December, Global Insight is currently forecasting another 600,000 jobs lost over the rest of 2008 and into the first quarter of 2009.

This second wave of foreclosures, however, isn't expected to be quite as significant as the first and current round, which has mostly been related to bad loans, Newport said.

According to the Mortgage Bankers Association, foreclosures in the first quarter of 2008 hit an all-time high of 2.47% - the largest percentage of loans in foreclosure since records began in 1978.

"It won't be as big as the wave we're riding right now, but it will just add to the problem," he said.

The third wave, expected to hit in 2010 and 2011, will be associated with interest-only loans made between 2005 and 2007, Newport said. In those loans, borrowers only pay the interest for the first five to seven years before they start paying off the principal, at which time their monthly payments increase.

Newport said those loans were one of the innovations that lenders came up with to make it easier for people to borrow, but noted they would mostly make sense for younger homebuyers who expect their incomes to rise in the future.

"I think in most cases they were just given to people who shouldn't have gotten loans," he said. "A lot of these homes are going to be deeply underwater when the monthly mortgage payment shoots up (and) there will be a very strong incentive for people to just walk away from their homes."

A recent report from the online real estate community Zillow.com reported that one in four U.S. homes sold over the past year were sold at a loss. California has some of the highest rates of homes being sold for a loss - more than 60% - while homes sold in foreclosure in that state have exceeded 50% of total sales.

The report also said the median U.S. home value of $206,919 has not been this low since the first quarter of 2004.

Newport said it's unknown whether the U.S. has seen the crest of home foreclosures, though he said monthly data is pointing to the upward trend continuing.

"It means more homes sitting on the market, falling home prices and builders not putting up new homes," he said. While Global Insight is currently forecasting the housing downturn to recover in early 2009, additional bouts of foreclosures could push back the housing market recovery to the second half of next year, Newport said.

By Stephen Huebl and edited by Sarah Sussman