US subprime mortgage losses may touch $300 billion: OECD
22 November 2007
Mumbai: The losses from the subprime mortgage market crisis in the US could go up to $300 billion, the Organisation for Economic Co-operation and Development said, adding that some $890 billion of sub-prime or poor credit quality mortgages would continue to haunt markets till March 2008.
While the super fund being set up by Citigroup, Bank of America and JPMorgan Chase to pool asset-backed securities of ailing special investment vehicles, policymakers need to buy time to ensure an orderly work-out, the OECD said in its latest Financial Markets Trends report.
"The super SIV idea clearly does provide a mechanism that gives ''time'' for all the stock adjustment prices to work through." This would prevent a further firesale of these assets by buying crucial time for financial firms to adjust, it said. "Time ... is key to solving the turmoil," the Paris-based forum said.
OECD said the worst of the US housing market meltdown had not yet been seen and would continue to depress mortgage-related debt products and derivatives held by banks, hedge funds and insurance companies.
"We still have not hit the worst point in resets, delinquencies and ultimate losses on mortgages," the OECD said, adding some $890 billion of sub-prime, or poor credit quality, mortgages will have rates reset in 2008 - with the peak expected about March.
A hypothetical 14 per cent loss on subprime mortgages could result in $125 billion in losses, the OECD said, adding, if the so-called `Alt-A'' mortgages are included, cumulative losses could go up to $200-$300 billion.
The financial exposure lies in repackaged mortgage-backed securities such as collateralised debt obligations (CDOs), held by hedge funds, banks and bank-sponsored structured investment vehicles. The OECD estimated outstanding CDOs and derivatives at close to $3 trillion in June, before the credit crisis emerged.