Analyst Warns of $400 Billion in Subprime Related Losses

Last updated on October 26th, 2010

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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