Economist's Outlook for Credit Quality Is Dire.

NEW YORK -- Mark Zandi, one of the nation's most prominent housing economists, is predicting that mortgage credit quality "will erode measurably" between now and next summer.

And if that isn't pessimistic enough, he also says that there is a relatively low, but rising, risk that a global financial shock could lead to further damage.

Speaking on a conference call with reporters last week, Mr. Zandi predicted that the U.S. mortgage market will see slightly more than 1.2 million mortgage defaults in 2007. He predicts the industry will see 1.3 million defaults in 2008. By contrast, Moody's Economy.com estimates that the industry saw about 800,000 defaults in 2005.

Those coming defaults will lead to about $125 billion in losses for investors in mortgage securities, he said, noting that his estimate is more pessimistic than Federal Reserve Board Chairman Ben Bernanke's. Recently, Mr. Bernanke made headlines by predicting that the subprime mortgage crisis could cause $50 billion to $100 billion in losses.

Mr. Zandi said the principal reason that he believes the mortgage credit decline has at least another year to run its course is that housing prices are not expected to recover anytime soon. He believes that nationally, home prices will decline 10% from their peak to their trough, with some markets seeing much more dramatic falls. He said he does not expect home prices overall to reach ...