Expert: 40% of Subprime Loans Could Default

An estimated 40% of outstanding subprime mortgage loans could go into default over the next three years based on current economic assumptions, according to Michael Bykhovsky, president of Applied Analytics, San Francisco. With an estimated loss severity in the range of 50%, that could lead to $200 billion in additional losses related to defaults on subprime home loans. During a press briefing sponsored by Fidelity National Information Services (the parent of Applied Analytics) at the Mortgage Bankers Association's National Mortgage Servicing Conference, Mr. Bykhovsky said there are an estimated $1 trillion of subprime home loans outstanding. He said he is skeptical of the prospects for term modifications that are being proposed as part of an effort to support subprime borrowers. "It will help, but not hugely," Mr. Bykhovsky said. "A lot of subprime loans will default anyway." Based on assumptions that include two more years of housing price declines, Applied Analytics projects that default rates may not start to trend downward until 2011. That dire outlook reflects the impact of declining home values on outstanding subprime mortgage loans, Mr. Bykhovsky said.