Second lien losses point to more severe stress levels in the future

07 May 2009

So, after the stress tests, $74.6bn equals a clean bill of health for the US financial system? Not so fast. Some initial analyses show that the loss estimates for various asset classes considerably understate likely outcomes.

The "more adverse" figures for second lien residential mortgages — an average loss of 13.8% — seem to highlight the questionable stringency of the tests, given the extremely high loss severities experienced so far in the sector. The indicative figures provided for the tests were 22% to 25% ...

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