updated 7/26/2007 3:51:26 PM ET 2007-07-26T19:51:26

The national housing slump could lead to billions of dollars in losses for Wall Street investors as it drags on for at least another year and mortgage defaults increase, economists said Thursday.

Major Market Indices

The outlook on eroding credit quality in the U.S. mortgage market by Moody's Economy.com anticipates that more than 1.2 million first mortgage loans will default this year and another 1.3 million will follow next year.

That compares with about 900,000 defaults last year and about 800,000 in 2005, Mark Zandi, the Web site's chief economist, said in a conference call.

Hedge fund investors will lose between $100 billion and $125 billion as a result, he said.

"We do expect losses in the subprime market to be very severe," Zandi said.

The mortgage industry has already seen a surge in defaults and anticipates an upswell in coming months as many adjustable mortgages begin to reset to higher interest rates.

Many of the loans were issued in 2005 and 2006 during the height of a housing market frenzy.

The loans, initially attractive options for buyers because of cheap "teaser" interest rates, can adjust upward after as little as two years. Even a small percentage increase can translate into a payment shock.

Zandi said the regions of the country that will exhibit the most defaults will be California, particularly the central region of the state, Las Vegas, Florida and areas around New York and Washington, D.C.

While delinquencies have occurred nationwide, the Northwest has weathered the problem better than other regions, Zandi said.

He expects the housing slump to last at least another year, with home sales bottoming out later this year and construction activity hitting a low in the first half of 2008.

Home prices, which have been flat or declining in many once-booming areas, should bottom out in the second half of next year with price declines about 10 percent off their peak, he said.

The rise in defaults and ongoing housing slump will have an impact on the broader economy, he said.

"I do think we'll see more of a spillover into consumer spending, which is weakening, and I think will weaken further over the course of the next couple of quarters next year," Zandi said.

Subprime loans to borrowers with spotty credit scores account for the biggest slice of defaults. But borrowers with all types of loans, including Alt-A and prime loans, which are typically accessible only to the most creditworthy borrowers, are also defaulting.

In all, there is $10 trillion in mortgage debt outstanding, Zandi said.

The decline in housing prices is driving the rise in defaults, as many financially strapped homeowners are unable to sell their home or refinance before missing payments.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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