Sept. 10 (Bloomberg) -- Anna Morita, a neuropsychologist in the San Francisco Bay Area with near-perfect credit, was certain she could get the loan of her choice to buy an $880,000 three- bedroom house.

Morita, 34, with more than $300,000 for a down payment and a credit score of 825 out of a possible 850, was banking on a 30-year loan with interest-only payments for 10 years. That mortgage became too expensive when her lender quoted a rate of 7.6 percent. She's now applying for another mortgage.

From buyers who can't afford costly loans to homeowners who can't find a buyer, the mortgage market is a mess. Home-loan defaults are at record levels and analysts predict property prices in the most-expensive metropolitan areas of New York, California and Washington, D.C., will fall in the next year in the broadest decline since 1995. Prices already have dropped in a third of U.S. markets tracked by the Chicago-based National Association of Realtors.

``No place will be immune,'' said Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California in Berkeley. ``Inventory is increasing and the demand side is falling off. The psychology has become negative.''

Home values in America's ritziest areas may decline by as much as 11 percent in the next 3 1/2 years, said Mark Zandi, co- founder of Moody's Economy.com, an economic forecasting agency and unit of Moody's Corp. in New York. The last time these markets fell was a dozen years ago when the Federal Reserve raised interest rates seven times in 11 months.

Rates Rise

The scarcity of credit has been brought on by rising delinquencies on subprime mortgages to people with poor or patchy credit histories. The number of U.S. homes facing foreclosure in July doubled from the year before to 179,599, according to the Washington-based Mortgage Bankers Association.

Subsequent decisions by Moody's Investors Service, Standard & Poor's and Fitch Ratings to cut the ratings of $14 billion in securities backed by subprime mortgages have shaken the confidence of investors and prompted lenders to reduce the availability of credit across all categories of borrowers.

Moody's today forecast more pain for the housing market, even for borrowers with good credit. Home sales will take a ``substantial hit'' in the next several months and the U.S. housing decline will probably last until 2009, Moody's said in a report.

Severe Decline

``The downturn is more severe and more protracted than we had expected,'' Joseph Snider, a senior credit officer with the rating service, said in an interview.

The cost for 30-year fixed-rate jumbo mortgages, those exceeding $417,000, has increased more than one percentage point since March to about 7 percent, data compiled by Bethesda, Maryland-based Bankrate.com show. August rates were the highest since December 2001. Jumbo loans aren't guaranteed by government sponsored entities such as Fannie Mae.

Mortgage rates increased even as the yield on 10-year Treasuries fell to 4.38 percent from 5.3 percent in June. The 10-year note will yield 4.69 percent by Sept. 30, according to a Bloomberg survey of 71 economists. The most recent forecasts are given the heaviest weightings.

Defaults Rise

As defaults climbed, half of the 20 biggest providers of so-called prime jumbo loans have sold or shut mortgage units this year, or gone bankrupt, data compiled by Bloomberg and Inside Mortgage Finance, an industry newsletter based in Bethesda, Maryland, show.

They include Melville, New York-based American Home Mortgage Investment Corp., which made $10 billion of prime jumbo loans during the first half of 2007; National City Mortgage Co. of Miamisburg, Ohio, which made $3.75 billion; and Capital One Financial Corp.'s GreenPoint Mortgage Funding Inc. of Novato, California, which accounted for $2.84 billion in prime jumbo funding through June.

``Investors have just vanished,'' said Douglas Duncan, chief economist at the Mortgage Bankers Association. ``It will reduce the number of sales and that may well bring prices down.''

Home prices will decline 5 percent to 10 percent from last year's peak in New York and San Francisco, and by more than that in Washington, said Rosen of the Fisher Center. Prices in second-home markets, including the Hamptons in New York, and Aspen, Colorado, also may fall, depending on the size of this year's Wall Street bonuses, he said.

New York to California

Prices may start to drop in the New York City metropolitan area beginning in the fourth quarter of this year and continue falling 1 percent to 7 percent per quarter through 2008, according to estimates from Zandi.

Prices started to drop in Orange County, California, as early as the third quarter of 2006, said Zandi. The median price in the Boston area fell 2 percent during the past quarter, according to the National Association of Realtors. In the San Francisco Bay Area, Zandi forecasts a decline of 3 percent in the last quarter of this year and subsequent drops of 4 percent to 6 percent for the following three quarters.

Home sales in the San Francisco Bay Area fell in July to their lowest in 12 years, although prices in the city remain steady, and houses are taking twice as long to sell in parts of Mclean, Virginia, outside Washington, D.C., according to DataQuick Information Systems and the Northern Virginia Association of Realtors.

Montclair Falls

In Montclair, New Jersey, the median price of a home sold in August fell 7.3 percent from a year earlier to $677,340, according to Prudential Zinn Associates Realtors. By contrast, the median price of a home in the hedge fund haven of Greenwich, Connecticut, is holding steady at about $1.9 million, said Barry Rosa, vice president of Prudential Connecticut Realty.

Long Island's inventory of unsold homes rose in the second quarter, climbing 6.4 percent in Nassau County and 10.6 percent in parts of Suffolk, excluding the beach towns in the Hamptons, according to appraiser Miller Samuel Inc. Nassau County is home to 1.3 million people with a median household income of almost $71,000, 56 percent higher than New York state overall.

In East Hampton, New York, the summertime playground for the rich and famous, real estate broker Diane Saatchi of the Corcoran Group just dropped the price on a four-bedroom classic 1910 house to $2.2 million from about $2.6 million. She had been trying to sell it for 10 months.

`Back to Reality'

``People are adjusting their dream prices back to reality,'' said Saatchi. ``If they want to sell in this market, they have to drop the price.''

Eleven metropolitan areas have median home prices of more than $417,000, the limit for mortgages guaranteed by government- chartered agencies Fannie Mae and Freddie Mac. The markets are San Jose, San Francisco, San Diego, Los Angeles and Orange County, California; New York City; parts of northern New Jersey; southern Connecticut; Long Island; the Washington metropolitan area and Honolulu.

``All of those housing markets will be under pressure as it has become more difficult to get a jumbo loan,'' Zandi said.

Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California in Los Angeles, said he expects a ``significant'' fall in housing prices if the squeeze in jumbo loans continues.

Manhattan Inventory

``Home prices in many coastal markets in California and on the eastern seaboard make the consumer highly reliant on the availability of jumbo mortgages,'' Gabriel said. ``The tighter the underwriting, the sharper the fall back in demand.''

Manhattan has so far been insulated from the housing slowdown, in large part because the economy is driven by Wall Street, where profits have set records in each of the past four years. Apartment sales more than doubled in the second quarter, data compiled by Miller Samuel show. That compares with the average 11 percent drop in cities tracked by the National Association of Realtors.

The number of deals Corcoran made in Manhattan rose 11 percent during the first week of August from a year earlier, said Chief Executive Officer Pamela Liebman. About 20 percent of the brokerage's buyers pay cash, she said.

``We've seen no change in the market based on the credit crunch,'' Liebman said. ``Inventory levels are very low and our demand is very high.''

For those who need financing, it's a different picture. Qualification standards at banks including Countrywide Financial Corp. in Calabasas, California, and Seattle-based Washington Mutual Inc. have become stricter for loans of more than $2.5 million even for buyers with down payments of 25 percent, said Suzanne Bach, senior vice president at New York-based mortgage broker Guardhill Financial Corp.

Loan `Shock'

Meghan Fajardo of New York City ran through two mortgage brokers and multiple lenders as interest rates rose to more than 7.25 percent from 6.25 percent for her $680,000 condominium in the Windsor Terrace section of Brooklyn, New York.

Fajardo, 29, closed on the 1,100-square-foot apartment on Aug. 9, agreeing to a 30-year fixed-rate loan at 6.875 percent with terms that call for her to pay interest only for the first 10 years. She initially planned to pay down the principal too. In the end, that would have been too expensive.

``It was a shock to me,'' she said. ``I wasn't really following the market that well.''

Four business days after the loan closed, the same mortgage Fajardo got from Countrywide had a rate of more than 8.5 percent, said Robert Raush, her broker at Icon Funding Group in Manhattan.

Higher Rates

``Rates are off the chart,'' said Rob Quillin, a loan consultant at Redwood City, California-based mortgage broker Pioneer Funding Group, referring to jumbos. ``What lenders are doing now is causing a domino effect. You have very qualified, very good borrowers who are not able to get mortgages.''

The credit rout is turning things upside down for real estate brokers, including David Morrell of Santa Cruz, California. Where once they had bidding wars for properties, they now have fewer buyers.

Morrell dropped the price of a $475,000 condominium by $30,000 after it sat on the market for four months. He got an offer within two days.

``Buyers are just waiting for really good deals,'' he said.

Homeowners like Steve Binder are feeling the sting.

Binder had an agreement in early August to sell his three- bedroom, 1,600-square-foot condominium for $618,000 in Aliso Viejo, California, about 50 miles south of Los Angeles. The deal fell apart when the buyer was rejected by banks after he sought 100 percent financing that included a jumbo mortgage plus a second loan.

``Our house is in turnkey condition,'' said Binder, 60, the owner of a metal-stamping company. ``The only reason it won't sell is what's going on in the market.''

To contact the reporters on this story: Sharon L. Crenson in New York at screnson@bloomberg.net; Dan Levy in San Francisco at dlevy13@bloomberg.net.

Last Updated: September 10, 2007 13:36 EDT