Analysts: Price Drop Could Sink New Loans.

Byline: Amilda Dymi

New York-Concern is growing that despite tighter underwriting standards and the demise of the riskiest loan products, falling home values could put newly originated loans underwater, raising the risk of default.

The S&P/Case-Shiller home price index showed home values fell at a record quarterly pace in the third quarter, amid few signs of improvement in the market.

And with unemployment - a key default driver - still rising, further price declines could leave many borrowers who took out home loans this year or will next year at risk of owing more money than their home is worth, according to economist Karl Case, a professor at Wellesley College and founding partner of the index.

"If prices keep dropping, 2008 and 2009 mortgages could be bad news. If prices continue to fall substantially next year, then that book is going to be underwater, too, and that's going to be very devastating to the economy," Mr. Case said during a conference call with reporters.

He noted that projections for a recovery in the housing finance industry have assumed that loans currently being originated will perform well and remain profitable.

S&P/Case-Shiller reported that home prices nationally were down 16.6% in the third quarter from a year earlier. That was higher than the rate of decline posted in the first and second quarters of this year.