Sunday, February 3, 2008

Additional $60B in Losses This Year for Commercial and Alt-A Mortgages

Losses for commercial real estate and Alt-A mortgages are expected to add $60B in additional losses this year. Text in bold is my emphasis. From Bloomberg:

Banks may face additional writedowns of as much as $60 billion this year from investments in commercial real estate and non-traditional residential mortgages, Goldman Sachs Group Inc. analysts said.

Commercial real estate prices may fall 21 percent to 26 percent from current levels, resulting in writedowns for banks of about $20 billion, Goldman Sachs said today in a report.

Home price declines will probably drive defaults in non- traditional loans such as Alt-As, which often include limited or no income documentation, resulting in $40 billion in markdowns, the analysts added.

The collapse of the U.S. subprime mortgage market has led to about $146 billion of losses and markdowns at securities firms and banks since the beginning of 2007. Losses may exceed $265 billion as regional U.S. banks, credit unions and overseas financial institutions write down the value of their holdings, Standard & Poor's said this week.

``Despite recent rate cuts, credit concerns should remain the dominant theme driving relative performance in financials,'' the Goldman analysts, who were not identified, said. ``Near-term mark- to-market losses on commercial real estate and exotic mortgage loans are unlikely to be ameliorated by recent policy actions.''

UBS AG, Europe's biggest bank by assets, this week said it had to make writedowns of $2 billion on U.S. residential mortgage securities other than subprime. The bank declined to specify the securities in question until it publishes detailed full-year earnings on Feb. 14.

The Zurich-based bank made writedowns totaling $18.4 billion on debt securities in 2007, the third-highest charges related to the subprime crisis among the world's biggest financial companies. New York-based Merrill Lynch & Co. and Citigroup Inc. reported writedowns and credit losses of $24.5 billion and $22.1 billion, respectively.

About 13 percent of the most-senior bonds created in securitizations of Alt-A mortgages last year may lose principal as defaults rise, and 2 percent of such securities from 2006, according to a Jan. 29 report by UBS analysts in New York led by Laurie Goodman.

``Good quality Alt-A is very attractively priced but investors need to differentiate,'' the analysts wrote. Aside from less proof of income, Alt-A loans also include mortgages deemed more default- prone because they allow principal repayment to be deferred, or make use of investor properties or second homes as collateral.

S&P, which this week said it cut or may reduce ratings on $534 billion of subprime-mortgage securities, in December lowered ratings on about $7 billion, or 1 percent of the $694 billion of Alt-A mortgage bonds created in 2005 and 2006, citing a sustained surge in delinquencies.

Since July, late payments on Alt-A loans in bonds issued in 2005 have increased more than a third to 8.62 percent while delinquencies for such mortgages in 2006 securities rose almost two-thirds to 11.64 percent, S&P said in December.

Monthly issuance of Alt-A and subprime mortgage bonds fell to $15.7 billion and $21 billion last year, respectively, from $36.7 billion and $58 billion in 2006, according to Arlington, Virginia- based FBR Investment Management. The markets have collapsed and by December, less than $2 billion of the debt combined was sold.

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