In a wide-ranging report looking the global credit crisis triggered by trouble in the mortgage market here in the United States, the International Monetary Fund warned Tuesday that the crisis has yet to play out. The IMF's latest Global Financial Stability Report for April pegged losses at an astronomical total, as well:
U.S. housing prices and rising delinquencies on mortgage payments could lead to aggregate losses related to the residential mortgage market and related securities of about $565 billion, including the expected deterioration of prime loans. Adding other categories of loans originated and securities issued in the United States related to commercial real estate, the consumer credit market, and corporations increases aggregate potential losses to about $945 billion.
delinquencies by mortgage class
click for larger view
"Financial markets remain under considerable stress because of a combination of three factors," said Jaime Caruana, head of the IMF's monetary and capital markets department. "First, the balance sheets of financial institutions have weakened; second, the deleveraging process continues and asset prices continue to fall; and, finally, the macroeconomic environment is more challenging because of the weakening global growth," he added. Credit deterioration, which was first evident in the U.S. subprime mortgage market, is now showing up in higher-quality residential mortgages, U.S. commercial real estate, and the corporate debt markets, according to the GFSR. These concerns are further exacerbated by a drop in valuations of structured credit products and a dramatic drying up of market liquidity, the report said. The graphs to the left provide a look at delinquency data for subprime, Alt-A, and prime mortgages. It's worth noting that even performance of prime loans in the 2007 vintage is mirroring what's already being seen in both the Alt-A and subprime categories. The IMF cited "worrying macroeconomic feedback effects" as its primary concern, where uncertainty leads banks and consumers to pull back, further exacerbating uncertainty -- and so the loop continues. It also noted that current market problems are not limited merely to liquidity, something a recent viewpoint feature on Housing Wire explored in the wake of Bear Stearns' historic collapse. "It is now clear that the current turmoil is more than simply a liquidity event, reflecting deep-seated balance sheet fragilities, which means its effects are likely to be broader, deeper, and more protracted," the study's authors wrote.