How long have you been following the mortgage banking industry?

Pretty much my entire life. My parents have worked in mortgage banking as long as I can remember -- my father's an attorney in the industry and represents many of the nation's largest mortgage operations. I spent my summers growing up working in his office and getting exposure that very few kids in junior high and high school ever get. I even worked in the family business after completing my MBA for awhile.

Most recently, I was the associate publisher and lead editor for DS News, a well-known trade publication targeted to the default servicing and REO disposition markets. I spent a year overseeing the publication's monthly print magazine, and organized the launch of its online news bureau as well. I also headed up conference planning for one of the largest conferences in the mortgage banking industry, called the Five Star Default Servicing Conference & Expo.

It probably goes without saying at this point that I've been lucky enough to cross paths with more than my fair share of industry experts, and I've learned a lot from being around them and simply listening.

When did you first realize that the easy credit train was heading for a crash?

I think most in the industry always knew the party would end at some point -- for me, I probably put two and two together earlier than most since I was so focused on the default servicing side of the mortgage market. And because I knew what I was hearing behind closed doors from foreclosure managers and loss mitigation specialists across the industry.

I (and many others on the servicing side of the industry, for that matter) knew for sure there were going to be problems cropping up in the not-to-distant future back in late 2005, but I didn't begin blogging about my views on the mortgage market until a few quarters after that -- after I had left my job as associate publisher in September 2006. As a mortgage trade journalist, I didn't have the freedom to write what I really thought; my publisher at the time didn't want his editor getting all rogue about how some of our key advertisers might be going out of business.

In a recent editorial, you wrote that there is a much more powerful wave of defaults about to hit. Can you tell us more about that, and offer an estimate of how many defaults you think we'll see before the end of 2008?

Without question, a more powerful wave of defaults is just over the horizon -- the main of subprime resets won't peak until March or April of next year. Based on the numbers I've seen from most of the Wall Street investment banks, the number of borrowers facing a reset at that time alone is well more than double those already in trouble. Closer to triple, actually.

And that's just for subprime. A similar growth pattern for resets exists in other credit classes as well, just not on the same scale as within subprime. That's a whole bunch of borrowers.

In terms of the number of defaults by the end of 2008, I'm always loathe to predict actual numbers, because so much could happen between now and then to either mitigate or magnify an outcome. We already know, for example, that President Bush has introduced an FHA program that appears as if it will help at least some borrowers -- if more aid packages are delivered, or an outright bailout for troubled borrowers, it could change the outcome significantly.

Most estimates I've seen put the total universe of at-risk borrowers around 4 to 4.5 million across all credit classes for both 2007 and 2008. Some go as high as 6 million. I'd probably lean towards the higher end of the overall spectrum, just because the effect of a lot of defaults is usually even more defaults. Foreclosures tend to feed off of one another, unfortunately -- and bring down entire neighborhoods in the process.

In your opinion, what is this relapse going to do to mortgage markets?

It's likely to get bloodier this year and next. Many more lenders will go out of business. I'd expect to see wholesale and correspondent lending practically disappear, especially in a non-conforming marketplace. Retail origination is going to take center stage as lenders retreat to a channel they can better control. That will cause job losses in the mortgage sector to accelerate.

Many companies that survived this first wave will catch their breath in time to be hit again. Many won't be ready for it. Others, like Countrywide, know what's coming -- the question is whether they've done enough to be able to ride it out.

Outside of federal intervention, it's going to be tough for any borrower -- even prime and conforming -- to buy a house without bringing some cash into the deal. 100 percent financing is quickly becoming a thing of the past, as lenders look to ensure newly-originated deals have more of an equity cushion than in years past. Other forms of exotic lending -- stated income, so-called exploding ARMs, negative amortization -- will become items for the history books only.

Fannie Mae and Freddie Mac are going gain far greater market presence and assume the role of the 800-lb gorilla in the room, and I wouldn't be surprised to see some significant changes to either their portfolio caps or conforming limits as a result. (That doesn't mean that I think these changes are a good idea, however.)

In terms of the capital markets, if you thought it was bad thus far, it's going to get a whole lot worse. When subprime defaults reach upwards of 30 percent -- as I believe they could early next year -- you're talking about wiping out entire equity and most mezzanine tranches from RMBS deals. The boys over at Moodys, S&P, and Fitch are going to be busy issuing more downgrades and adjusting their models all over again.

How about home prices?

They'll fall; in most cases, they already have. Some markets could see drops in excess of 25 to 30 percent. Other markets will be more resilient, as much as I hate agreeing the NAR on the 'all real estate is local' mantra. I'm certainly not the first to predict price declines.

Would a mortgage bailout exacerbate the pricing problems we are about to face?

I recently authored some commentary -- hailed by some, despised by others -- that argued that this would most certainly be the unintended outcome of a borrower bailout attempt.

The reason is simple: the problem we're facing isn't with the mortgage instruments per se -- it's with the borrower, many of whom simply never had the income they needed to acquire the house they're now sitting in. The lending instruments merely allowed that to take place. A bailout may change the lending instrument but cannot fix the underlying problem: we have millions of borrowers who simply can't afford a mortgage on the property they're now in.

So a bailout would effectively entail debt forgiveness to bring a mortgage within reach for the troubled borrower -- and that balance will be far below a general market equilibrium that would be reached if these borrowers simply lost their homes altogether.

Think rent control here. Rent control is widely known by most economists to reduce the quality and quantity of housing; a borrower bailout is essentially an application of the rent control concept to homeownership. I'm simply arguing that 'rent control' will have the same effect on housing that it already has had on numerous rental markets.

What about further changes in Fed rates?

The Fed will undoubtedly reduce rates -- we know now where the FOMC has its focus, and it's no longer inflation.

I'd expect the Fed target rate to drop 25 to 50 basis points before the year is out. A 75 bp drop shouldn't be considered out the question.

Who is pushing hardest for Fed cuts and mortgage bailouts: Borrowers? Investors? Consumer advocates?

I think all are pushing as hard as they can for very different reasons, but investors have unique leverage over fiscal and monetary policy that neither borrowers nor consumer advocates possess. Guys like Bill Gross at PIMCO can move markets and sway policy makers, because troubles at his hedge fund mean trouble for global economic markets. A borrower lobby simply can't carry the same gravitas.

What's interesting is why each group in pushing for something akin to a bailout -- money managers will say it needs to be done for the sake of borrowers, when the truth is they want it done because they know that a borrower bailout and an investor bailout are synonymous with each other. You can't do one without also doing the other.

Will the housing and mortgage finance industries ever fully recover--with or without a bailout?

Of course! I'm often wrongly painted as a housing bear. I see myself as a market realist, and right now the bears have it right; this won't always be the case. I'm working hard to make sure Housing Wire stays grounded in terms of its industry perspective -- which probably costs me some readers since I'm not as sensational as many in the bubble crowd. But the approach also probably gives me a longer life span, and has won me loyal readership from senior managers and CEO in the field and at places like Fannie Mae, Freddie Mac and nearly every Wall Street player -- it's that sort of level-headed perspective I hope defines the site long-term, both in good times as well as bad.

I'm a young guy -- barely into my thirties -- but I've been in this industry long enough and I've been lucky enough to be around enough industry veterans to know that this business is cyclical. Up must come down, yes, but down must also go back up. Eventually.

That being said, most downturn cycles take 5 to 8 years to recover completely, which means we won't be looking at another robust mortgage market until 2012 or so. That doesn't mean we'll be in the doldrums for that long -- it just means that recovery will take that long.

It's too early to be calling a bottom of the current cycle at this point, but barring some other economic problems creeping in to mix up the picture some more, I currently expect that we will start seeing consistent evidence of a housing recovery in the middle of 2009. If other issues creep into the picture, however, all bets are off.

Either way, it's going to be a pretty rough ride for the near term.