You may think there's a race to prove the largest possible loss caused by the mortgage mess and credit crisis. Goldman Sachs (NYSE: GS) believes the loss could reach $2 trillion in lending, according to Bloomberg this morning. Jan Hatzius, chief economist at Goldman Sachs in New York, estimates that losses related to foreclosures could be as high as $400 billion for financial companies. This loss will be compounded as banks and hedge funds scale bank lending.

Hatzius calculated the loss stated in his report using this assumption: "A $1 mortgage credit loss could result in a reduction in lending by significantly more than $10." So even if one believes that only $200 billion will be lost, half of the actual estimates, that translates to a $2 trillion cut in lending. The first bank to estimate the total loss from foreclosures at $400 billion was Deutsche Bank, as I discussed earlier this week.

Losses already on the books at major financial companies total $50 billion from the mortgage mess and more are expected by the end of the year. If something is not done quickly to stem the tide of foreclosures, the potential loss could be even greater as Option ARMs reset in 2009 and 2010. Option ARMs are a prime mortgage product, not a subprime product. So far the foreclosures have primarily been in the subprime mortgage market.

Yesterday I wrote about a ruling in an Ohio court that stopped 14 foreclosures because Deutsche Bank (NYSE: DB) did not have paperwork to prove that it actually owned the properties it was trying to seize. If this spreads to other courtrooms around the country, the losses could go even higher. It's time for financial institutions to get as creative in their packages to fix the problem and find ways for people to stay in their homes as they were when they created these ridiculous mortgage schemes that led us into this mess.

Lita Epstein has written more than 20 books including, "The 250 Questions You Should Ask to Avoid Foreclosure" and the soon to be released "Complete Idiot's Guide to Improving Your Credit Score."

A white knight has come to the rescue of homeowners about to lose their homes to foreclosure. A federal district court in Ohio dismissed 14 foreclosure cases brought by Deutsche Bank (NYSE: DB) on behalf of mortgage investors because they couldn't produce proof that they owned the properties they were trying to seize, the New York Times reports today. These complicated mortgage securities, totaling $6.5 trillion of securitized mortgage debt as of the end of 2006, make it easy for investors to trade the securities, but harder for them to prove actual ownership in the courts.

Until this ruling, the courts have been letting them get away with it. They've also gotten away with the lax legal standards of proof because most people facing foreclosure don't have the money to fight lenders in court. Judge Christopher Boyko asked Deutsche Bank on Oct. 10 to file copies of loan assignments showing that the lender was indeed the owner of the note and mortgage on each property when the foreclosure was filed. But the bank couldn't do that. It could only show that there was an intent to convey the rights in the mortgages rather than proof of ownership. That's because to make things easier for the banks to buy and sell these securities the actual mortgage notes are not shipped around the world.

MOST NOTEWORTHY: Eaton Vance (EV), American Woodmark (AMWD), Deutsche Bank (DB) and Talbots (TLB) were today's notable downgrades:

• JP Morgan cut Eaton Vance (NYSE: EV) to Underweight from Neutral on the significant drop in municipal bond performance and valuation.

• Raymond James cut American Woodmark (NASDAQ: AMWD) to Underperform from Market Perform following the weak Q1 report and guidance.

• Deutsche Bank (NYSE: DB) was downgraded to Neutral from Buy at Goldman based on valuation.

• Talbots (NYSE: TLB) was cut to Hold from Buy at Stifel following the weak Q2 report and guidance...

OTHER DOWNGRADES:

• Zumiez (NASDAQ: ZUMZ) was downgraded to Market Perform from Outperform at Piper Jaffray.

• JP Morgan cut Broadridge (NYSE: BR) to Neutral from Overweight.

• Sandler downgraded Flushing Financial (NASDAQ: FFIC) to Sell from Hold and TriCo Bancshares (NASDAQ: TCBK) to Hold from Buy.
  

• RBC Capital downgraded Tween Brands (NYSE: TWB) to Sector Perform from Outperform.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MOST NOTEWORTHY: PepsiCo (PEP), Countrywide Financial (CFC), KKR Financial (KFN), Home Depot (HD) and Visteon (VC) were today's notable downgrades:

• PepsiCo (NYSE: PEP) was cut to Neutral from Buy at Goldman based on valuation.

• Merrill downgraded Countrywide Financial (NYSE: CFC) to Sell from Buy, citing liquidity concerns in the mortgage sector as accelerated margin calls and forced asset sales could lead to further problems and selling pressure.

• KKR Financial Holdings (NYSE: KFN) was downgraded to Market Perform from Outperform at Friedman Billings based on the liquidity crisis and impact on equity. Lehman cut shares to Equal Weight from Overweight based on capital market funding concerns.

• Home Depot (NYSE: HD) was downgraded to Hold from Buy at Gabelli due to near-term uncertainty.
  

• Goldman downgraded Visteon (NYSE: VC) to Sell from Neutral...

OTHER DOWNGRADES:

• Credit Suisse downgraded UBS (NYSE: UBS) to Neutral from Outperform.

• Merrill cut Deutsche Bank (NYSE: DB) to Neutral from Buy.

• Bear Stearns downgraded LG Philips LCD (NYSE: LPL) to Peer Perform from Outperform.

• Keefe Bruyette downgraded Security Bank (NASDAQ: SBKC) to Underperform from Market Perform.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MOST NOTEWORTHY: CV Therapeutics, Inc (CVTX) and Stone Energy Corp (SGY) topped today's modest-sized list of downgrades:

• Citigroup cut CV Therapeutics Inc (NASDAQ: CVTX) to Sell from Hold with a $6 target due to the diminished market potential for Ranexa and its high operating expenses. First Albany downgraded shares to Neutral from Strong Sell to reflect the lack of catalysts.

• Matrix USA cut Stone Energy Corp (NYSE: SGY) to Strong Sell from Hold, believing significant cost increases are driving negative fundamental trends.

OTHER DOWNGRADES:

• Deutsche Telecom AG (NYSE: DT) was downgraded to Peer Perform from Outperform at Bear Stearns as the firm believes evidence of a turnaround needs to be seen before shares move higher.

• Thomas Weisel cut Brady Corporation (NYSE: BRC) to Market Weight from Overweight to reflect lower confidence in management's ability to deploy capital effectively.

• Overseas Shipholding Group Inc (NYSE: OSG) was downgraded to Hold from Strong Buy at Matrix USA.

• American Technology downgraded Sigma Designs, Inc (NASDAQ: SIGM) to Neutral from Buy with a $28 target.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MOST NOTEWORTHY: Novartis AG (NVS), Barnes & Noble, Inc (BKS), Altria Group (MO) and Advanced Micro Devices (AMD) were some of today's more notable upgrades:

• Credit Suisse upgraded Novartis AG (NYSE: NVS) to Neutral from Underperform on valuation and the approval of its drug Tekturna.

• Merrill Lynch upgraded shares of Barnes & Noble, Inc (NYSE: BKS) to Neutral from Sell on valuation.

• Deutsche Bank believes the recent weakness in Altria Group (NYSE: MO) presents a buying opportunity given the potential to unlock value, upgrading shares to Buy from Hold.

• JMP Securities upgraded shares of Advanced Micro Devices Inc (NYSE: AMD) to Market Outperform from Market Perform following checks that indicate the company's next-generation "Barcelona" quad-core server chip and next-generation low-power mobile PC processor chip is exhibiting excellent power, performance, scalability, and price/performance characteristics at key OEM customers.

OTHER UPGRADES:

• ThinkEquity upgraded Microchip Technology Inc (NASDAQ: MCHP) to Accumulate from Source of Funds following the company's improved guidance.

• Morgan Stanley upgraded Eni SpA (NYSE: E) to Equal-Weight from Underweight as they believe management made it clear that the dividend is sustainable and a large-scale acquisition is not forthcoming.

• JP Morgan upgraded Deutsche Telekom AG (NYSE: DT) to Neutral from Underweight citing management's new focus on customer service and expectation's for modest growth for the upgrade.

• AG Edwards upgraded Anheuser-Busch Companies Inc (NYSE: BUD) to Buy from Hold.

• Morgan Joseph upgraded Boyd Gaming Corp (NYSE: BYD) to Buy from Hold based on key markets the company operating in and its diversification.

• Bernstein upgraded Cablevision Systems Corp (NYSE: CVC) upgraded to Outperform from Market Perform.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MOST NOTEWORTHY: Today's more notable downgrades included Dell Inc (DELL), Deutsche Telekom ADS (DT) and the Nasdaq Stock Market Inc (NDAQ):

• Needham downgraded Dell inc (NASDAQ: DELL) to Hold from Buy after the Q4 results as they now believe the company is unlikely to outperform for "at least" several quarters. They considered Dell's notebook shipments to be the biggest disappointment in the quarter.

• Deutsche Telecom ADS (NYSE: DT) was cut to Sell from Neutral at Merrill Lynch.

• JP Morgan downgraded the Nasdaq Stock Market Inc (NASDAQ: NDAQ) to Neutral from Overweight following the company's price cuts as they feel the new prices negatively impact the U.S. cash equity business.

OTHER DOWNGRADES:

• Baird cut Xerium Technologies Inc (NYSE: XRM) to Underperform from Neutral, citing increased spending plans and pressure from the underlying paper market that raised dividend sustainability concerns.

• First Albany downgraded Hyperion Solutions Corp (NASDAQ: HYSL) to Neutral from Buy.
  

• Sanders Morris cut Crosstex Energy (NASDAQ: XTEX) to Hold from Buy. Raymond James downgraded shares of Crosstex to Market Perform from Outpeform.

• Bernstein downgraded TXU Corp (NYSE: TXU) to Market Perform from Outperform as the firm believe the current bid from Kohlberg Kravis Roberts and Texas Pacific Group will succeed.

• Merrill Lynch cut Altera Corp (NASDAQ: ALTR) to Neutral from Buy.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).