Years of post-crunch subprime debt losses to come, says Fitch

By Tracy Alloway

The packaged debt at the heart of the global financial crisis has realised just a quarter of the $376bn of losses it is expected to generate over coming years, suggesting the effects of the collapse in subprime debt will be long-lasting.

Four years after the onset of the credit crunch, so-called structured finance deals in the US have lost $94bn, or about 2.7 per cent, of their original $3,540bn value, according to a new study from Fitch Ratings. The rating agency forecasts that percentage to rise eventually to 10.6 per cent, underscoring how losses from subprime securitisations are still working their way through the financial system.

In the years running up to the crisis, banks bundled together ?toxic? mortgage debt into an alphabet soup of structured securities, including collateralised debt obligations (CDOs) and residential mortgage-backed securities (RMBS). These securities were sold to a wide range of investors – including insurers, money managers, and other financials – many of whom are now choosing to sue the issuing banks over alleged fraud or conflicts

of interest.

?With structured finance the loss often doesn?t get crystallised until the maturity date of the deal,? said Fitch?s Kevin Duignan. ?So it may be 10 or more years before all of the losses are fully written down, but that doesn?t mean people aren?t recognising the losses now. We expect the vast majority of the remaining losses to be recognised over the next three to five years.?

Fitch said that RMBS, backed by home loans, and CDOs, often repackaged RMBS, have generated the biggest losses for their investors, accounting for 92 per cent of both realised and forecast future losses for the entire US structured finance universe.

About half of all losses to date come from deals backed by subprime mortgages, which account for almost a quarter of the original $3,540bn balance.

Not all structured finance deals have fared badly. Bonds backed by US credit cards and car loans were expected to generate very small or even non-existent losses for investors, Mr Duignan said.

Rating agencies themselves were criticised after the crisis for handing out triple-A ratings, the highest available, to subprime debt. The new study is part of Fitch?s ?credit crisis four years on? series, itself an attempt to understand better what went wrong during the subprime debacle.

? The Financial Times Limited 2011