Subprime Foreclosure Losses May Reach $300-Billion

Posted on November 23rd, 2007 by saman

The Organization for Economic Cooperation and Development (OECD) has stated that losses from the U.S. sub prime mortgage foreclosures along with falling home prices and slowing economic expansion, could reach as high as $300-billion. As of right now, stock markets worldwide have lost $2.9-trillion since October 31st while the collapse of the sub prime markets has caused around $50-billion in write-downs from the world’s largest banks. The American dollar, which has also declined against other leading currencies of late, could also fell additional downward pressure due to foreign investors become increasingly unwilling to purchase higher-yielding debt.

According to the OECD, a recession in America is now seen as considerably more likely than it was previously. Moreover twice as many U.S. economists are now forecasting a recession than only two months ago according to the National Association for Business Economics.

U.S. property foreclosures doubled in the third quarter of 2007 compared to 2006 because sub prime adjustable rate mortgage holders who had large interest rate resets could no longer make payments on their loans. This big jump in foreclosures has worsened the U.S. housing recession by dramatically increasing the number of houses on the market while sales and prices continue downward.

Ominous Predictions The Federal Reserve Bank of Minneapolis has predicted that foreclosures will probably rise over the next several quarters and the “adjustment” in the housing market has “a way to go”, according to bank of Minneapolis’ President Gary Stern. The OECD also said that approximately one fifth of sub prime mortgages are estimated to be in risk of going into default. They added that how big the losses will actually be and the precise affect on financial institutions will be a function of what happens to interest rates.

The interest resets on somewhere around $750-billion in subprime loans may occur this year and that amount may likely rise to $890-billion in 2008. One report assumes there may be a loss rate of 14% or $125-billion, on sub prime mortgage loans after borrowing costs are reset in 2008.

Not only risky creditors will be affected. Rates on $400-billion in Alternative-A mortgages may also be reset in 2007, before going up to $475-billion in 2008. These Alt-A loans fall somewhere between prime loans given to the most credit worthy borrowers and the sub prime mortgage loans to customers with shaky credit or heavy debts.

Expectations are that most such resets will take place in the first between January and March of 2008 which will result in a further increase in defaults, according to the OECD. Foreclosures could rise to historically-high levels. In addition, losses at banks and securities firms are prompting concerns that escalating delinquencies on home loans to people with poor credit histories will further depress the overall economy.

The big drop in worldwide credit markets are likely to force banks, hedge funds and brokerages to cut lending by $2-trillion as well, according to economists at Goldman Sachs. And continued stock market volatility, along with periodic volatility in equity markets is also predicted.