Experts Foresee Pressure on Credit.

Washington -- With delinquency rates edging up at the end of last year, economists warn that lenders should be prepared to see loan problems continue rising in the near term despite a strong economy.

A study by PMI Mortgage Insurance finds that the likelihood of a drop in home prices has increased in 48 of the 50 largest metropolitan areas in the U.S. (See related story, page 9.)

Brian Carey, an economist with Moody's Economy.com, said that slowing home price appreciation is mixing with other factors to weaken what has been a historically strong credit quality environment in recent years. And with interest rates rising, Mr. Carey told MSN that borrowers with adjustable-rate mortgages may feel payment shock when their loans adjust. Economy.com projects that 30-year mortgage rates will reach 6.9% by the end of the third quarter, up substantially from a 6.2% average in the first quarter. "I think three is going to be upward pressure on delinquency rates," he said.

He believes, as do many economists, that home price appreciation is slowing down. Until recently, robust gains in home prices helped hold down default rates.

The markets most at risk of a price decline are the ones where affordability is limited at today's home prices, he said. Southern California cities, as well as markets in the Northeast such as New York and Boston, are vulnerable because huge price gains in recent years have pushed many potential buyers out of the housing market.

And mortgage delinquency data for late last year show that indeed, credit quality is starting to show some fissures.

Nearly a quarter of home loans in Louisiana were past due at the end of December. In Mississippi, the delinquency rate was 17.4%. And while the least serious category of delinquencies - those between 30 and 60 days past due ...