Singapore: Losses from US subprime mortgage foreclosures, coupled with slowing economic growth and falling house prices, could reach as much as $300 billion (Rs11.82 trillion), the Organisation for Economic Co-operation and Development (OECD) said in a report released on Wednesday in Paris.
Global stock markets have lost $2.9 trillion since 31 October and the collapse of the subprime market in the US has triggered about $50 billion in write?downs among the world’s largest banks. The dollar could also face further downward pressure as overseas investors, who previously bought structured products based on subprime loans, become more unwilling to buy higher-yielding debt, the OECD said.
“Recent economic news points towards a more protracted economic adjustment,” it said. “A recession in the US is now seen as more likely than before by some observers.”
The number of economists forecasting a US recession almost doubled in the past two months, according to a survey by the National Association for Business Economics.
“I don’t think the US will technically fall into recession, but we’ll certainly have a slowdown,” said Guy Sebban, secretary general of Paris-based International Chamber of Commerce.
Home foreclosures in the US doubled in the third quarter from a year earlier as subprime borrowers failed to make higher payments on adjustable-rate mortgages. The jump in foreclosures is exacerbating the US housing recession by increasing the number of homes on the market. Foreclosures are likely to rise over the next few quarters, and the “adjustment” in the US housing market has “a way to go”, Federal Reserve Bank of Minneapolis president Gary Stern said this week.
“Roughly a fifth of subprime mortgages are estimated to be at risk of default,” the report said. “The ultimate size of losses and their impact on financial institutions will not be independent of what happens to interest rates.”
Interest rates on about $750 billion of subprime loans may be reset this year, and the amount will probably climb to $890 billion in 2008, the OECD said. The report assumes a hypothetical loss rate of 14%, or $125 billion, on subprime mortgages after borrowing costs are reset next year. Rates on about $400 billion of Alternative-A mortgages, which are meant for homebuyers with limited documentation, may be reset in 2007, the report said, before rising to $475 billion next year.
Losses at banks and securities firms are fuelling concern that rising delinquencies on home loans to people with poor credit will drag down the economy.
Jean-Remi Baudot in Paris contributed to this story.