Fitch Ratings estimates total market losses from subprime mortgage assets at US$400 billion.
In a special report published today, the rating agency reports its current subprime loss forecasts. However, it allows that estimates may be as high as US$550 billion, depending on the method of calculation used.
“Subprime mortgage-related losses for the total market vary considerably depending on the methodology used,” says Krishnan Ramadurai, managing director in Fitch’s Financial Institutions Group. “We believe that Fitch’s internal loss estimate of US$400 billion is a more appropriate reflection of losses though they are also sensitive to assumptions made on underlying loss rates.”
Approximately 50% of these losses, US$200 billion-US$275 billion, are held by banks, with the remainder held by financial guarantors, insurance companies, asset managers and hedge funds, Fitch adds. It also estimates that, as of May, disclosed losses by banks on subprime residential mortgage-backed securities or collateralised debt obligations referencing mortgage-backed securities to be US$165 billion, or 83% of the banks’ portion of the losses.
“To the extent that institutions have effectively hedged their exposures with financially sound counterparties, these loss figures may be over-estimated,” says Gerry Rawcliffe, managing director and group credit officer for Fitch’s Financial Institutions Group. “Nevertheless, for those institutions that did not hedge a sufficient portion of their super-senior exposures, mark-to-market losses on these residual exposures have been so large that their capital ratios have come under acute stress.”