U.S. Subprime Defaults to Rise, Credit Suisse Says

The vice chairman of Credit Suisse Asset Management has seen the future of subprime mortgages in the U.S. And it’s not good, at least in the near term, according to a speech he gave at a bond market conference yesterday in Hong Kong.

Borrowers who received loans under relaxed underwriting standards will continue to default as more and more of them miss payments, said Vice Chairman Robert Parker, according to Bloomberg.com.

“It’s naïve to assume the worst is past us in the U.S. subprime market,” Parker said. “At least over the balance of this year, the subprime default rate will rise.”

The subprime market’s effect on the U.S. has been growing. Investment manager Bear Stearns last month had to spend $1.6 billion to shore up one of its hedge funds that invested in the market. And last week Cambridge Place Investment Management LLP announced it would close its Caliber Global Investment Ltd. fund that invested in subprime mortgage debt that had $908 million of assets in March.

The subprime fiasco is starting to drag in other players. Ohio Attorney General Marc Dann is charging that the three big bond rating agencies were lax in their credit assessments of investments that included pools of subprime mortgages, according to Fortune magazine.

Fitch, Moody’s, and Standard & Poor’s are the three major raters of financial instruments. The three are paid by investment houses like Bear Stearns to rate asset backed securities (ABS) and collateralized debt obligations (CDOs) that may include subprime mortgages.

Dann tells Fortune that the rating agencies gave the funds AAA ratings despite the increasing likelihood that subprime mortgage holders couldn’t pay their bills.

States are watching the markets carefully because public pensions have invested in the products. Ohio has the third-largest group of public pensions in the U.S., according to Fortune.

Still, Credit Suisse’s Parker sees a silver lining in the mess. He doesn’t expect mounting defaults in subprime mortgages to spread to other markets or hurt the U.S. economy. “The problem is confined to subprime,” he said. “The problem is not over but it is not presenting a systemic risk to the U.S. financial system or to the U.S. economy.” Parker is based in London and helps to oversees $502 billion in investments.

European regulators are concerned that sooner or later American subprime problems might jump the pond, so to speak. Britain’s Financial Services Authority announced Wednesday there could be similar problems in the British subprime mortgage market, and that it will be taking action against five brokers that it says have failed to improve their lending practices, according to Forbes.com.