For the first time in 16 years, U.S. house prices have fallen, raising fears over the economy. This could in turn have a knock-on effect on the rest of the world.

This doesn’t seem to be an isolated incident, as the UK Land Registry is reporting a long-expected fall in the British property market — a 1.1 percentage fall last month, bolstered only by buoyant figures for London.

Standard & Poor’s/Case Shiller Index reports that American values fell 1.4 percent in the first quarter compared with the same period last year. They were also down 0.7 percent on the final quarter of 2006.

The OECD (Organization for Economic Cooperation and Development) warned that the spillover effect could be “more pronounced than generally expected”.

At a Congressional hearing of the House Financial Services Committee on Tuesday, speakers explored ways to clear up the subprime mortgage mess.

ARMs (Adjustable Rate Mortgages) have fueled the foreclosure increase when, after the initial fixed part of the loan ends, rates balloon into payments borrowers can no longer afford.

In addition to setting up a rescue fund for borrowers who face short-term problems due to illness or job layoff, recommendations included establishing a bond fund to help pay for borrowers switching out of their ARMs and into traditional fixed-rate mortgages. In cases where consumers fall victim to predatory lenders, the government would refinance loans through Fannie Mae.

Lenders may be willing to go along with these recommendations due to the cost of foreclosures. Typically, a bank loses money on a foreclosure because of costs involved in keeping the house on the books, maintenance and sales commissions. Additionally, houses that have been foreclosed upon sell for less than market value.

Panelists at the hearing included spokesmen for the FDIC, HUD, Fannie Mae and Freddie Mac, various consumer groups and lenders.

According to a study by the Center for Responsible Lending, subprime mortgages produced more than $2 trillion in home loans but these loans have led to a loss in home ownership, not an increase.

A higher percentage of subprime loans end in foreclosure than prime loans. The CRL estimates that more than 15% of subprime loans orginated since 1998 either have ended in foreclosure or will end in foreclosure. It isn’t just new home buyers who have experienced loss of home ownership, these figures include borrowers who refinanced loans.

Foreclosure has long-term effects and homeowners who lose their homes may not get back into homeownership for ten or more years.

Subprime Lending is a Net Drain on Homeownership

The Mortgage Bankers Association is reporting that more homeowners are falling delinquent on their mortgage payments. According to their report, 4.7% of loan payments were more than 30 day past due and 11% of mortgages were in foreclosure.

The trend is being blamed on high-risk loans with subprime rates and adjustable rate mortgages that are being affected by rising interest rates over the past few years.

More Americans Making Late Mortgage Payments