Mortgage-Related Losses: Banks In For Rough Times?


January seems to be that time when we spend half our time looking at where we’re going and the other half looking at where we’ve been. When it comes to mortgage-related losses, a fascinating study by Paul Miller of FBR really puts it all in perspective.

Miller tallies a total of $94 billion in mortgage-related write-downs since August of 2007 by the worldwide banking system. That’s when the market repriced the securities thanks to falling home values and rising foreclosures. He anticipates banks will lose between $59 billion and $148 billion over the next few years.

The bulk of the losses, Miller writes, will come from home equity loans, although Alt-As and Subprimes will still weigh on the books. Here’s the perspective I like:

Paul Miller:

Residential real estate values stand at $21 trillion, supported with $10.4 trillion of mortgage debt, which suggests that roughly 50% of the residential market is financed and 50% consists of homeowner equity. Of the $10.4 trillion in mortgages, approximately $6.3 trillion is securitized, with the remaining $4.1 trillion held as whole loans by regulated banks. The $6.3 trillion in securitized loans consists of $2.2 trillion of non-agency mortgages and $4.1 trillion of agency mortgage bonds. Most of the market value write-downs are from the non-agency mortgage bonds, mostly subprime and Alt-A, and we expect further write-downs over the next few months before they subside.

Questions? Comments?