US sub-prime mortgage losses

The current turmoil in the US and global economy due to losses in US sub-prime mortgage debt (and sub-prime mortgage debt in other countries too) is fed partly by the fact that no one is able to quantify the losses exactly, and partly by the fact that no one is quite sure who has those losses, including the banks who hold some of the debt. This uncertainty prevents banks from lending aggressively, as they need to conserve their capital in case their exposure to sub-prime mortgages, whether directly, through structured credit, or through SIVs, turns sour.

I'm going to try to answer the first question using Fermi estimation. This approach is unlikely to work for the second question however, so we'll resort to plain old guessing.

What are the losses on US sub-prime mortgages?

• The total stock of US sub-prime mortgages is certainly more than $1.3 trillion. Say $1.8 trillion to be conservative, although in reality we are interested in the 2003-2007 vintages.
• The major losses will be on the 2006 and 2007 vintages. According to Moodys, approximately 7% of October 2006 loans were delinquent in March 2007. Eyeballing the figure in the document, it's quite possible that 15% of loans written in October 2006 are delinquent now. Loans written in 2007 would probably have higher delinquency rates, say 18-20% by mid-2008. This would be a reasonable upper bound, given that loans of 2003, 2004 and 2005 (probably about 30-40% of the total stock) would have a lower delinquency rate.
• Total eventual losses on US sub-prime mortgages are likely to be around $1.8 trillion * 18-20% = $320-360bn. Remember, this is an upper bound estimate.

Who's got them?

Well, the following major writedowns have already taken place, or been part announced - Citigroup = approximately $17bn, Barclays Capital = $3bn, Merrill Lynch = $4.5bn, UBS = about $10bn, HSBC = $3.4bn, Bear Stearns = $2bn, Morgan Stanley = $3.7bn, Deutsche Bank = $3.1bn, Credit Suisse = $2bn, AIG = $2.7bn. That's more than $50bn so far, but not all of it will have been in US sub-prime mortgages. Some of it will also have represented mark-to-market losses, not defaults which are unlikely to be recovered. So there could be more than $300bn of writedowns still to come.