Source: Moody's Economy.com

In a three-hour conference call with Wall Street analysts, Countrywide Chief Executive Angelo R. Mozilo dished up more bad news for housing, mortgage and the stock market.

According to Mozilo, prime borrowers - the most creditworthy borrowers - are starting to default on their loans. The defaults are thought to largely be the result of traditional upsets like job loss and the new trend of falling home prices, and are largely concentrated among borrowers who took out home equity loans.

At the end of June, 5.4 percent of the home equity loans issued by Countrywide to borrowers with good credit were in default. While this is more than double the number of defaults from one year ago, it is still fairly low when compared to the 20 percent of subprime loans that are past due.

Nevertheless, it marks the beginning of a very disturbing trend.

'Countrywide is highlighting what is an industrywide problem,' said Christopher C. Brendler, an analyst with Stifel Nicolaus, an investment firm in St. Louis.

Brendler added that a second mortgage can be compared to an unsecured loan, much like a credit card. While such loans aren't always risky, they can be difficult to pay back in times of financial difficult or when home prices have fallen so far that borrowers are unable to recoup what they owe.

What Does This News Mean to the Housing Downturn?

At one point, Countrywide was predicting a recovery for housing in mid-2008, but the company now expects that conditions will not improve until 2009, and even then they are not ruling out the possibility of continuing home price declines.

'Looking to the second half of 2007, we expect difficult housing and mortgage market conditions to persist,' Mozilo said.

And Mozilo isn't the only one who thinks so. Many economists and housing experts have offered up similar or even worse predictions.

Mike Shedlock, investment advisor representative and the owner and operator of Mish's Global Economic Trend Analysis, maintains that there has never been a bubble in the U.S. as big as this one, and that the market will take a significant amount of time to recover.

'I suspect it will take at least five to seven here, and five is very optimistic. It could easily take 10 years or more. My best guess is seven but it all depends on what the Fed does to fight it,' said Shedlock in a recent interview.

If the housing slump does drag on as predicted and mortgage defaults continue to increase, lenders and Wall Street investors could suffer huge losses. Estimates are in the billions of dollars.

Perhaps worse yet, everyday homeowners will have their own woes as home prices inevitably begin to fall. Many will be left owing more on their home that it is worth, and just as many will be unable to sell due to the lack of qualified (and interested) borrowers.