The Bankwatch

Tracking the consumer evolution of financial services

Bank asset revlauation – unfortunately its the next mortgage crisis

In keeping with the theme that bank assets need to be properly valued before confidence can be returned to the system, this piece summarises the next immediate problem.  As you read this, bear in mind that the American system for most states employ the non-recourse system.  This little known implication just came known to me recently, and further explains the extent of the fear on bank asset value.  Non-recourse means the homeowner can walk away from a home where the mortgage exceeds the home value with no recourse from the bank back to that homeowner for the shortfall.  This is quite different than other countries, and frankly an insane provision for a rational economy.

Decay is spreading to the upper floors of America’s mortgage market | economist

The sums involved are depressingly large. In the worst case, losses on the $600 billion of securitised Alt-A debt outstanding—roughly the same as the stock of subprime securities—could reach $150 billion, reckons David Watts of CreditSights, a research firm. Analysts at Goldman Sachs put possible write-downs on the $1.3 trillion of total Alt-A debt—including both securitised and unsecuritised loans—at $600 billion, almost as much as expected subprime losses. Add in option ARMs, a particularly virulent type of adjustable-rate loan, many of which are essentially the same as Alt-A, and the potential hit climbs towards $1 trillion.

The amounts are alarming.  Bear in mind these amounts will also have been securitised and purchased by banks elsewhere.  The above statistics suggest that even Roubini’s estimate (courtesy of John Maudlin)  of 50- 60% of US bank assets being bad could in fact be optimistic.

This is the challenge facing Geithner, and his preparatory words to Congress and G7 this week suggests to me he understands the extent of the challenge.

roubini-losses

Written by Colin Henderson

February 14, 2009 at 18:14

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