Mortgage Losses Could Add Up To $1 Trillion

[Aug 14, 2008.]

 

The US housing crisis will yield a combined total of $1 trillion in losses for financial institutions worldwide, says bond fund head Bill Gross.

Bill Gross announced the web site of his Pacific Investment Management Co. that more than 50% of America's home loans are comprised of high-risk, high-interest loans of the subprime and Alt-A variety. That percentage amounts to $5 trillion worth of loans. Moreover, stated Gross, 25 million homes in America are likely to decrease in value in the upcoming years. This decrease in homeowners' equity could cause additional foreclosures, which, in turn, might cause still more homes to drop in value, causing the current housing crisis to spiral to new depths.

As of today, global financial giants such as Merrill Lynch, Citigroup, and others, have lost a known total of $467.9 billion starting in early 2007. The assertions of Bill Gross suggest, therefore, that the world stands to lose more than half that amount before the crisis is over.

Gross demanded action from the federal government in response to the situation outlined by dire predictions. "The problem with writing off $1 trillion from the finance industry's cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets [or] a reduction in lending... that in turn begins to affect economic growth," stated Gross.  Gross added that the government's recent efforts to save the economy, including its attempts to come to the aid of mortgage lenders Freddie Mac and Sallie Mae, have not been nearly enough.

James Wolfensohn, a one-time president of the World Bank, agrees with Bill Gross's projections. Wolfensohn predicted losses of $1 trillion at the end of April, 2008. Gross is also joined in agreement by pundit Charles Morris, who recently wrote The Trillion Dollar Meltdown. Meanwhile, back at the beginning of April, 2008, the International Monetary Fund forecast $945 billion in US mortgage and housing crisis-related write-offs across the globe.