The subprime mortgage mess is mostly over, as global banks have already written down more than 80 percent of their losses from subprime mortgages and related assets, Fitch Ratings said in a report released Wednesday. The rating agency estimated that total market losses from subprime mortgage assets at $400 billion, though losses could go as high as $550 billion, depending on the method of calculation used. The loss estimates come as many market participants have jumped in recently to assess the damage inflicted thus far by subprime mortgage bonds and CDOs of ABS backed by subprime RMBS. Fitch’s own calculations of losses, based on its internal estimates of loss rates for RMBS and CDOs of ABS, suggest that subprime losses will reach $401 billion. Analysts at the rating agency said they believe that roughly 50 percent of subprime-driven exposure — anywhere from $200 to $275 billion — are held by banks, with the remainder held by financial guarantors, insurance companies, asset managers and hedge funds. Given $165.3 billion in reported losses at banks thus far — or 80 percent of its own estimate of banks’ collective exposure — Fitch suggested that the subprime mortgage mess is nearing an end; to say nothing, of course, of larger credit problems plaguing the mortgage sector. Fitch’s internal models assumed an average loss rate of 17 percent and 53 percent, respectively for subprime RMBS and CDOs of ABS; declines in the ABX and TABX, two indices broadly used as a proxy for subprime MBS and CDO market trending, suggest that investors have priced in a far more severe loss experience for subprime RMBS than Fitch said it believed to be appropriate. “Subprime mortgage-related losses for the total market vary considerably depending on the methodology used,” says Krishnan Ramadurai, managing director in Fitch’s financial institutions group. “Given the problems associated with methods of calculation based on ABX and TABX indices, we believe that Fitch’s internal loss estimate of $400 billion is a more appropriate reflection of losses, though they are also sensitive to assumptions made on underlying loss rates.” “To the extent that institutions have effectively hedged their exposures with financially sound counterparties, these loss figures may be over-estimated,” says Gerry Rawcliffe, managing director and group credit officer for Fitch’s financial institutions group. “Nevertheless, for those institutions that did not hedge a sufficient portion of their super-senior exposures, mark-to-market losses on these residual exposures have been so large that their capital ratios have come under acute stress.” The subprime market originated as much as $1.4 trillion of loans voer the course of the past three years, Fitch estimated. For more information, visit http://www.fitchratings.com.

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