- The Washington Times - Thursday, January 29, 2009

Financial institutions worldwide could suffer another $1 trillion in losses on mortgages and other bad loans, the director of Congressional Budget Office testified Wednesday.

The losses would come on top of $1 trillion in write-offs that banks and other lenders have already taken.

Most of the first $1 trillion in losses was related to residential real estate, CBO Director Douglas Elmendorf told the Senate Budget Committee. The next trillion dollars will include major hits on commercial real estate, credit cards and auto loans, he said, citing a January report by Goldman Sachs.

“With the economy weakening, losses on loans are likely to continue to deplete the capital of financial institutions for the foreseeable future,” Mr. Elmendorf testified. “Such conditions raise the prospect of a vicious cycle of loan losses, leading to further reductions in the availability of credit, weaker economic activity, more loan losses and so on.”

CBO also forecast a further 14 percent decline in home prices through June 2010, more than twice the cumulative 6.9 percent decline from July 2007 through September 2008.

As many as 11.7 million households owe more on their mortgages than their homes are worth. If the national average price of a home plunges an additional 14 percent, that number will soar.

“Continuing declines in house prices and the ongoing recession are likely to worsen the financial condition of banks,” Mr. Elmendorf told the committee. Delinquency rates continued to rise during last year’s third quarter, and foreclosure rates remained high for both prime and subprime loans.

The Obama administration and the Federal Reserve hope to limit the number of “preventable foreclosures.”

The Fed announced Tuesday that it would ease loan terms on the home mortgages it acquired in the rescue of American International Group and Bear Stearns. For borrowers delinquent 60 days or more, the Fed will seek to modify interest rates and payment plans.

However, recent evidence shows that loan-modification strategies are failing, according to Patrick Newport of IHS Global Insight. He cited a recent study of 73,000 loans modified in the first quarter of 2008. About 25 percent of those loans were delinquent after one month, and 60 percent were delinquent after eight months, Mr. Newport said.

Even with vigorous efforts to combat it, “turmoil in the housing and financial markets is likely to continue for some time,” the CBO director predicted.

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