Where the Wolf Comes Knocking

Areas Already in Economic Distress Feel Rise in Housing Foreclosures Most

In Miami, a sign tells of the hard times that have fallen on housing industry, with foreclosures on all homes at the highest level in nearly four decades. (By Joe Raedle -- Getty Images)

The big question is: How bad will it get?

So far, the rising mortgage defaults that panicked markets this week have been concentrated in areas of the country already reeling from layoffs in the automobile industry and in hurricane-stricken states on the Gulf Coast.

In Mississippi and Louisiana, about 1 in 10 homeowners are failing to make their payments, fresh data show. Ohio, Michigan and Indiana, the nation's industrial heartland and the states suffering the country's highest unemployment, aren't far behind.

Yet the repayment of mortgages is holding up well on the Atlantic and Pacific coasts and in other parts of the country, including those that saw huge run-ups in property values in recent years.

Not only that, but there is scant evidence -- so far -- that the mortgage problems are causing wider economic damage. But the big worry, on Wall Street and on Main Street, is that the trouble will spread, worsening the downturn in the housing market and possibly tipping the economy into a painful recession.

"The question now is whether the pathology of the housing market is going to infect the rest of the economy," said Edward E. Leamer, director of the Anderson Forecast at the University of California at Los Angeles. "We're optimistic about the economy . . . [but] it's going to feel like a depression in the housing sector."

A few economic Cassandras have been warning for more than a year that the mortgage market was ripe for trouble that could take down the whole economy. They've not yet been proven right, but in recent weeks they have been looking a lot smarter.

"The tragedy of the current situation is that it was entirely predictable," said John H. Vogel Jr., a professor at the Tuck School of Business at Dartmouth College, who wrote in 2005 about the dangers of mortgage-loan excesses. "What's surprising is how fast this is unraveling," he said. "Mortgage brokers pushed exotic mortgage products that allowed people to buy houses that only made sense if prices kept rising. Now that houses have stopped appreciating, people are going to lose their homes and their savings."

A major sign that broader trouble could be brewing emerged Tuesday after a national survey by the Mortgage Bankers Association showed a soaring number of homeowners failing to make their mortgage payments in the last three months of 2006. The group also reported that foreclosures on all homes leaped to the highest level in nearly four decades.

That news sent every major stock-market index plummeting as soon as it was released Tuesday.

A deeper look at the survey reveals a tale of two Americas.

In many parts of the country, including the Washington region, housing prices skyrocketed beyond income growth over the past few years. Millions of people, wanting to get a piece of the action, got risky types of mortgages to finance a home-buying splurge that was beyond their means.