July 9 (Bloomberg) -- Investor losses on bonds backed by U.S. subprime mortgages may total $52 billion, according to Credit Suisse Group, the low end of estimates, as analysts begin to determine the fallout from rising delinquency rates and foreclosures.

Subprime defaults are ``clearly a huge problem'' for investors in collateralized debt obligations, Credit Suisse analysts led by Ivan Vatchkov in London wrote in a report. ``But we do not think that they are a systemic one.''

Hedge funds will be damaged more than banks because they typically hold the parts of CDOs first in line for losses. Banks will probably lose between $5 billion and $15 billion from their investments in CDOs, the report said.

``Investment banks operate in this market day and night and they know it better than most,'' Vatchkov said in an interview today. ``The market's been turning for the past 12 months, so I think they saw it coming.''

Estimates on the fallout from the subprime slump range between $75 billion from Pacific Investment Management Co. in Newport Beach, California, to as much as $90 billion from Deutsche Bank AG, based on mortgages made to last year to borrowers with poor or limited credit records or high debt burdens.

Credit Suisse says the maximum potential losses for investors in CDOs is equivalent to about a tenth of the $513 billion of equity capital for the world's biggest 10 investment banks. It's less than a quarter of the $227 billion that flowed in to hedge funds and mutual funds in the first three months of this year, Switzerland's second-largest bank said.

Hedge Funds

CDOs package bonds and loans into varying pieces of risk, using their income to pay investors. Losses on subprime CDOs may be as little as $26 billion, according to Zurich-based Credit Suisse.

Bear Stearns Cos. in New York, the world's fifth-biggest securities firm, is providing $1.6 billion to rescue one of its hedge funds invested in subprime debt. Queen's Walk Investment Ltd., a mortgage debt fund run by London-based Cheyne Capital Management Ltd., last month said it lost 67.7 million euros ($91 million) for the year to March 31.

Cambridge Place Investment Management LLP in London last month closed the $908 million Caliber Global Investment Ltd. fund after losses on U.S. subprime debt.

Not Transparent

Banks are likely to suffer smaller losses on their own investments in CDOs than from lending to hedge funds that may be unable to repay the debt, according to Credit Suisse. The bank has ``outperform'' ratings on UBS AG in Zurich and Frankfurt- based Deutsche Bank because European banks are among the ``most conservative buyers'' of CDOs, said the report from the London- based equity-research team.

``Banks' direct exposure to CDOs is not as high as people think,'' said Vatchkov. ``Banks have lent money to the people who bought the risky equity tranches of CDOs, but that market isn't transparent enough to estimate exposure and risks there could be bigger.''

Banks tend to hold the senior parts of CDOs rather than the riskier equity pieces, the report said.

U.S. home sales in 2007 will drop to the lowest level since the start of the housing boom in 2001 as mortgage rates and foreclosures increase, according to a forecast by Freddie Mac today. Delinquencies and defaults on U.S. subprime mortgages will keep rising as borrowers who received loans with less rigorous checks fail to keep up with repayments, Robert Parker, vice chairman of Credit Suisse Asset Management, said on July 5.

Loans that require little or no documentation of income made up 46 percent of all U.S. subprime mortgages last year. U.S. homebuyers with undocumented income defaulted at a rate of 13 percent in February.

Goldman's CDOs

The share of subprime mortgages entering default in the first quarter was the highest in almost five years, the U.S. Mortgage Bankers Association said. Borrowers are defaulting on subprime mortgages at the fastest rate since 2002, according to the trade group.

Goldman Sachs Group Inc., the biggest U.S. securities firm, last week said the value of its CDOs fell by $1.56 billion, or 29 percent, in the second quarter. Its fixed-income revenue fell 24 percent in the same period as rising defaults cut the value of debt secured on mortgages. Losses in the U.S. market may be the ``tip of the iceberg,'' Bank of America Corp. analysts said last month.

The impact of losses for banks should investors stop buying CDOs and asset-backed debt wouldn't be ``that material'' because the entire business of securitization only accounts for between 4 and 6 percent of bank revenue, Credit Suisse said.

Banks and asset managers sold 59 billion euros of CDOs in Europe so far this year, 104 percent more than the same period a year ago, according to Deutsche Bank data.

To contact the reporters on this story: Neil Unmack in London at nunmack@bloomberg.net; Sebastian Boyd in London at sboyd9@bloomberg.net

Last Updated: July 9, 2007 14:16 EDT