Mortgage loss is put as high as $300 billion

OECD says worst part is still ahead

November 24, 2007|By New York Times News Service

FRANKFURT, Germany -- Losses in the distressed mortgage sector of the United States could reach $300 billion, only a portion of which has so far been accounted for by write-offs at major banks, according to a study by the Organization for Economic Cooperation and Development.

Major financial institutions, including Citigroup Inc., Merrill Lynch & Co. and Swiss Reinsurance Co., estimated losses of about $50 billion.

But the OECD warned that a rougher period may yet await financial markets, which have swooned in recent days as traders grew anxious over the impact of mortgage-sector losses on the overall economy.

The OECD, which has its headquarters in Paris, is an organization of 30 countries. It compiles statistics and helps governments with economic, social and governance issues.

The organization said in its report that mortgage resets - the point at which the interest rate on a loan shifts upward to reflect current borrowing costs - have not peaked, but will probably do so next May.

"We still have not hit the worst point in resets, delinquencies and ultimate losses on mortgages," it said.

The group estimated the losses based on a 14 percent default rate on subprime mortgages. The estimate is high by historical standards but entirely plausible under the current circumstances, economists say. Losses on subprime loans - those made to the least creditworthy borrowers - would cost lenders $125 billion, the organization said.

Factoring in so-called Alt-A mortgages, ones given to people with better credit but still not high-end, the organization concluded that an overall loss of $300 billion looked feasible.

The loss numbers reflect not just the value of the mortgages but also the total cost to lenders of a bad mortgage, once they have foreclosed on and sold the house to recoup losses. But, the organization said, much will depend on how banks react - or are forced to react - to future defaults.

Banks and other investors are exposed to the mortgage market through securities backed by housing loans. The problem in financial markets could force write-offs far in excess of what actual defaults turn out to be.

By contrast, if they can hang on until the U.S. housing market bottoms out and allows a fuller picture of what losses are, those losses probably can be absorbed with relatively little shock, economists say.

"The most important variable the markets are facing right now is time," said Adrian Blundell-Wignall, an economist who worked on the study for the organization. "Time is what lets you get out of jail in this case."

Investors have pounded stocks far afield of the financial sector in recent days as traders debated the risks of a broader hit from the credit crunch. If the worst situation were to occur, banks would constrict lending to the rest of the economy.

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