By Prabha Natarajan Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Fannie Mae (FNM) reported eye-popping losses as a result of the sharp deterioration in home loans it had guaranteed, and warned that its credit losses would continue to mount into next year. Now for the really bad news: Friday's dismal report that the unemployment rate had hit 10.2%, exceeding the Federal Reserve's highest projection much earlier than expected, will mean that Fannie's losses will continue longer than expected. Housing analysts say they have to raise their forecasts on mortgage delinquencies and foreclosures as unemployment creeps up. Despite a rising number of home sales and other positive data, the broad housing market won't really recover until employment picks up. "The rise in unemployment rate is an indicator of people's inability to pay mortgages," said Mark Fleming, chief economist with First American CoreLogic, which analyzes loan data. "You have risk that's not limited to prime, subprime or Alt-A, but affects everyone across the board." Over the spring and summer, the housing market showed signs of recovery with home prices clawing back from the depressing lows that they hit last winter. Further, sales of existing homes also improved as first-time buyers took advantage of a federal credit and low mortgage rates. Such improvements scaled back some of the negative equity on houses. However, this tentative recovery could be erased if job losses continue to grow and the economy stays down. "Most people will continue to pay mortgages and live in their house, especially if it's owner occupied, whether negative or underwater on the loan," Fleming said. "It's only when I lose my job or some other precipitating event that makes it difficult to pay a mortgage and I don't have equity, that I think of walking away." Fannie, which holds $198.3 billion in nonperforming loans, says the dual stress of rising unemployment and falling home prices are responsible for this high number. In June, the agency had $171 billion in nonperforming loans on its books, and that was up nearly two-thirds from $119.2 billion at the end of last year. The government has tried to help these borrowers by arranging loan modifications and refinancing options, and now is prepared to let people lease homes after losing them to foreclosure. But it's unclear if these efforts would do much more than provide temporary props to the problem. "Improving employment conditions is the key to producing sustainable recovery in housing," say CreditSights housing analyst Frank Lee in a recent presentation, adding that the government measures have failed to address the underlying problems of high unemployment and rise in mortgage delinquencies and foreclosures. The team also pointed to an overlooked data - continuing unemployment claims - that goes in tandem with job losses. Those receiving unemployment benefits for 26 weeks is at 6 million, with 3.8 million more people receiving these benefits under federal extension programs. When these folks are weaned off these support programs, there is likely to be a spurt in mortgage delinquencies and foreclosures. CreditSights projects that it may take six years, under the most optimistic terms, for employment to return to pre-recession levels, and until then problems in the housing market aren't likely to go away. -By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; prabha.natarajan@dowjones.com -0-
