Overall losses from the U.S. mortgage market crisis could be up to $300 billion but financial firms and policymakers need to buy time to ensure an orderly work-out, the Organization for Economic Co-operation and Development said on Wednesday.
The OECD said the super fund being set up by Citigroup , Bank of America and JPMorgan Chase to pool asset-backed securities of ailing special investment vehicles -- thus preventing a further firesale of these assets -- was one mechanism for buying that crucial time.
"The super SIV idea clearly does provide a mechanism that gives 'time' for all the stock adjustment prices to work through," the OECD said in its latest Financial Markets Trends report. "Time ... is key to solving the turmoil."
But the Paris-based forum said the worst of the U.S. housing market downturn 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.
The OECD said a hypothetical 14 percent loss on subprime mortgages being reset in 2008 could result in $125 billion in losses. If so-called Alt-A mortgages are included, cumulative losses in the $200-$300 billion range "seem feasible," it said.
The financial exposure to these losses lies in repackaged mortgage-backed securities such as Collateralized Debt Obligations (CDOs), variously held by hedge funds, banks and bank-sponsored structured investment vehicles.
The OECD estimated outstanding CDOs and synthetic versions was close to $3 trillion in June, before the worst of the credit crisis emerged. Bank SIVs were around $400 billion that month.