S&P Puts Additional Losses on US RMBS at $260-375 billion
Total additional losses from legacy US Residential Mortgage-backed Securities are expected to reach $260 billion: $165 billion from subprime, $90 billion from Alt-A, and $5 billion from prime RMBS, according to Standard & Poor’s Market, Credit, and Risk Strategies group (MCRS).
In a worst-case economic scenario, total losses could reach $375 billion: $235 billion from subprime, $132 billion from Alt-A, and $10 billion from prime.
MCRS, an independent group within S&P, reviewed the total amount of private-label (not issued by Fannie Mae or Freddie Mac) residential mortgage-backed securities (RMBS) outstanding, as well as their current performance record. Their findings:
- With more than $4 trillion in mortgages securitized since 2004, the legacy assets remaining on the balance sheets of banks continue to unwind themselves through repayments and defaults with a total remaining balance of $2 trillion.
- Prime, Alt-A, and subprime structured RMBS transactions totaled $3.7 trillion in issuance since 2004 and through repayments and defaults, the outstanding balance remains at $1.7 trillion.
- The MCRS group expects total additional losses from the legacy assets to reach $260 billion: $165 billion from subprime, $90 billion from Alt-A, and $5 billion from prime RMBS. In a worst-case economic scenario, we would expect $375 billion in total losses: $235 billion from subprime, $132 billion from Alt-A, and $10 billion from prime.
- Given that the securitized structures assumed a certain loss percentage before equity tranches began to suffer losses, even relatively low nonperforming balances in prime mortgage structures would be damaging to equity-tranche investors.
- A total of $250 billion in loans is in bankruptcy, foreclosure, or REO, though banks will recover a percentage of these balance through the sale of properties, but these properties will keep home prices depressed.
For full details see Putting A Dollar Value On Legacy RMBS Losses
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