NEW YORK -- A recovery in global credit markets will depend on stabilization in U.S. home prices and a massive reduction in housing inventory, former Federal Reserve Chairman Alan Greenspan told Deutsche Bank AG clients Wednesday, according to sources.

Greenspan, the U.S. Fed chairman from 1987 until 2006, also blamed the credit crisis on a "general underpricing of risk" and a "breakdown" of how assets are valued after the U.S. housing bubble burst, sparking broader concerns about credit markets last year.

"The sooner we can get home prices in the United States stabilized, the sooner we will resolve all questions," Greenspan said, according to two sources who were on a conference call with the former central bank chief.

Excessive housing inventories must fall before more signs of recovery are evident, Greenspan said. One in 10 U.S. homeowners now hold mortgages that are larger than the worth of their homes, according to Moody's Economy.com, a sign that foreclosures may rise, adding to inventory and depressing home prices.

"The level of housing has got to fall," Greenspan said, according to one source on the call. "If it doesn't fall further we are going to be involved with a continual backing up of inventory pressing on prices."

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U.S. home prices dropped in the fourth quarter, the first consecutive quarters of decline since 1982, according to Freddie Mac, the second largest U.S. home funding company.

Greenspan, retained as a senior adviser to Deutsche Bank in August, added that he sees companies buying back stock in record volumes and that corporate balance sheets are in relatively good shape, according to the sources.

"We still have a way to go, but we are at least seeing some early signs that the process is well underway," said Greenspan, who in January was named an advisor to Paulson & Co., a $30 billion hedge fund that successfully bet last year that the mortgage markets would fall.

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