Light in the Mortgage Loss Tunnel?

According to the Bank of England, banks have been too conservative in predicting mortgage credit losses.

Britain's banks are overstating losses from the turmoil in the credit markets and the sub-prime lending debacle, the Bank of England says.

Some £12bn has been written down by UK banks during the crisis but, in its latest Financial Stability Report, the Bank says that may be too high. "Prices in some credit markets are now likely to overstate the losses that will ultimately be felt by the financial system," it says. The Bank estimates that depressed market prices for sub-prime mortgage-backed securities imply a default rate of 76 per cent, with a loss to the banks of 50 per cent of the loan, both unprecedented. The Bank's analysis would mean a recovery in these prices, as bargain hunters come to swoop on undervalued securities, with a resulting easing in the credit crisis in the coming months.

It's impossible to say with certainty, but it would not surprise me if U.S. banks have also been overly conservative in their asset writedowns, despite what many doom-and-gloom analysts (read: Meredith Whitney) say.