| Banks Suffer Bad Credit Loan Backlash |
| By Credit Federal |
Published
11/12/2007
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Financial News
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Problems due to the backlash of subprime, bad credit loan mortgages appear to be worsening
JPMorgan Chase bank; once praised for managing risks associated with subprime related assets, disclosed Friday that its fourth quarter earnings would be hit by the deterioration of that segment. And Bank of America; which had already announced a write off associated with subprime loans, also disclosed that its fourth quarter earnings would suffer from the collapse in the credit markets.
Other financial institutions announcing problems include Wachovia, which reported a $1.1 billion decline in the value of its subprime holdings, and E-Trade which said it would not meet its previously announced earnings targets.
According to some analysts, the subprime loan losses could reach $400 billion, as at least one in four of the risky home loans go into default. Mike Mayo, an analyst at Deutsche Bank Securities Inc, estimated $150 billion to $250 billion of losses based on $1.2 trillion of U.S. subprime loans, and an additional $150 billion of losses on derivatives linked to subprime debt.
David Hilder, a Bear Stearns & Co analyst, also estimated a $150 billion to $250 billion loss on subprime home loans, in what he called a $2 trillion market.
Banks including Citigroup Inc, Merrill Lynch & Co and Wachovia Corp have announced more than $40 billion of write offs this year as U.S. foreclosures set records and after investors stopped buying many kinds of risky debt.
Mayo said large banks and brokerages may suffer $100 billion to $130 billion of the subprime losses. He said this could include $60 billion to $70 billion by year end, including $43 billion already reported.
Mayo's forecast assumes a 30-40% default rate and 40-50% loss rate. Hilder assumes a 25-30% default rate and 30-40% loss rate.
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