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Analyst Warns of $400 Billion in Subprime Related Losses

Deutsche Bank analyst Mike Mayo warned today that losses spawning from the declining value of subprime assets could be as high as $400 billion, eclipsing previous estimates made by the Fed which hovered around $100 billion.

In a research note, Mayo estimates loan losses of $150 billion to $250 billion based on $1.2 trillion in U.S. subprime loans, and an additional $150 billion of losses on derivatives related to subprime debt.

The Deutsche analyst said roughly $1.2 trillion of the $10 trillion in outstanding U.S. home loans are considered “subprime”.

He expects large banks/mortgage lenders and brokerages to report a loss between $100 billion and $130 billion related to subprime loans, including $60-$70 billion by year end, with $43 billion already reported.

Deutsche Bank itself wrote down $3.15 billion in the third-quarter alone.

Mayo said he expects write-downs at large banks such as Barclays, HSBC, Royal Bank of Scotland, and UBS to be roughly $5 billion each in the fourth quarter, while Merrill Lynch may write off $4 billion, and Bank of America $1 billion.

His research numbers assume a 30-40 percent loan default rate and a 40-50 percent loss rate.

Bear Stearns analyst David Hilder also revealed a bleak assessment of the global mortgage crisis, estimating a $150 billion to $250 billion loss on subprime loans, based on a $2 trillion market.

“Given our fundamental outlook, which is for rising inflows of non-performing loans in both mortgage and commercial loan portfolios, we believe the odds are in favor of the write-downs getting worse, rather than better,” this year, Hilder wrote.

Deutsche Bank plans to hold a conference call regarding subprime debt on November 15, according to the research note.

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