WASHINGTON: The worst may not be over for the US mortgage sector, whose shakiness has rippled across financial markets worldwide, many economists say.

With a long US property boom now fading into memory, mortgage delinquencies and defaults are on the rise, especially at the lower or "sub prime" level among people with poor credit scores and those who borrowed beyond their means.

According to data released last week by the Mortgage Bankers' Association, delinquencies on home loans reached 4.95 percent of all outstanding loans in the final quarter of 2006, the highest level for three and a half years.

"Increases in delinquency and foreclosure rates were noticeably larger for sub-prime loans," MBA chief economist Doug Duncan said.

Before the boom turned to bust in parts of the United States, many would-be home buyers desperate to get on the ladder took out variable rate mortgages at special "teaser" rates of interest.

Those rates have now shot up, with the Federal Reserve's benchmark borrowing rate now standing at 5.25 per cent, and average monthly repayments are becoming unmanageable for many.

"More is likely to come, given this (MBA) report only reflects the mortgage market as of the end of 2006," Wachovia financial economist Gina Martin said.

According to a Wall Street Journal survey Thursday, 32 out of 60 economists said it was likely that the sub-prime turbulence would spill over to the rest of the mortgage market. But the respondents ruled out a recession.

Credit troubles engulfing several leading sub-prime lenders, including the market's number-two New Century Financial, contributed to a rout on global stock markets early last week.

New York and other major markets had steadied by the end of the week, but there remained the concern for some investors that the sub-prime ructions could reverberate through blue-blood Wall Street firms that lent to the sector.

"Now the sub-prime and mortgage and credit crunch genie is out of the bottle, and no amount of self-serving spin will be able to lock it back in the bottle," New York University economist Nouriel Roubini said.

The broader fear is for US consumer spending, given the property boom's pivotal role in sustaining economic growth in recent years.

As long as prices were rising, homeowners could refinance their mortgages to sustain their high spending. But with real-estate prices now stagnant or falling, that avenue is closed for many.

But not everyone sees doom ahead. Briefing.com president Dick Green said "the broad economic impact of these problems is vastly overblown."

"The sub-prime mortgage market, by definition, covers low-income consumers ... The impact on total spending is likely to be far less than the impact of rising gasoline prices in 2005-2006, which hit all consumers," he said.

"Real GDP (gross domestic product) growth plowed through that problem."

Federal Reserve chairman Ben Bernanke late last month said the central bank was working on new guidelines for the underwriting and disclosure of sub-prime loans.

But he stressed that "at this point we don't see it as being a broad financial concern or a major factor in assessing the course of the economy."

Nevertheless, the mortgage market difficulties have resonated on Capitol Hill.

Democratic Senator Christopher Dodd, a 2008 presidential contender, attacked "predatory lenders and regulatory failures" that he said are costing rising numbers of Americans their homes, and promised to look at new legislation.

The MBA's Duncan, however, rejected changes to the law.

He said "market discipline in this industry is swift, can be severe, and is more effective at changing lending practices than any potential changes in regulation."

- AFP/yy