AIG: Mortgage crisis worsening

Good morning again. Investors do not like the news from Europe and from the central banks -- BNP Paribas, the big French bank, froze $2.2 billion in funds damaged by sub-prime investments, and central banks in Europe and Washington rushed to add liquidity to the banking system.

--The Blue Chips fell 200 points in the first 10 minutes of trading.

--Not helping: AIG, the big insurance company, put out a gloomy report on mortgage defaults: "Residential mortgage delinquencies and defaults are becoming more common among borrowers in the category just above subprime, American International Group said on Thursday."

--Fed Funds futures trading indicate traders are now certain -- certain -- that the Fed will cut interest rates in September.

Comments? Insights?

Comments

[Sean B]

The biggest problem to come to light from these CDOs will be the ratings services inability to accurately assign risk. If BNP Paribas bought "high grade" CDOs that imploded, then the ratings of any obligation is suspect.

There will be a massive inability to provide liquidity until this shakes out, and the underlying worth of bonds can be readily determined.

[gemini guy in LA]

Traders are "certain the Fed will cut rates in September".

We don't know this for a fact. Traders and others have been hoping for a rate cut for a while now and it still hasn't happened....... nor is it likely.

What some forget is that the US DOLLAR MUST COMPETE with the Euro and Pound as an investment vehicle. If rates are rising overseas (and they are...) the Fed cannot cut inetrest rates as this makes the dollar less attractive. How the heck else can the US finance its massive deficits and spending?

And if a rate cut did occur - it would be token at best - say a quarter point. While helpful, it is not going to make the bigger mess go away. Nope, you'd need a really big cut - which is not going to happen.

[PMI]

I haven't heard anyone say anything of private mortgage insurance's role in this debacle. Since most people in SoCal the last few years have not been putting 20%, for at least some of these loans (probably a lot of these loans), won't it be the insurers that get left holding the bag?

[Jonah]

I agree gemini guy...

Hard to cut interest rates when the dollar is already so weak and inflation is higher than the fed would like. I wouldn't want to be in Bernanke's shoes right now.

[JamesW]

PMI,

These people probably didn't get PMI either, they probably got a piggyback for the 20% with a teaser rate as well

[Ultra bear]

I think a lot of people doing 100% financing have been taking out 2 mortgages to avoid the PMI. The second mortgage acting as the 20% downpayment. The second mortgage usually has a much higher interest rate than the first mortgage, so these buyers are screwed anyways.

[Cal]

PMI Group, MGIC, Radian, all are tightening both the price of risk (cost of MI) and what risk they are willing to take. Riskier loans are costing more or just becoming unavailable.

[www.BetterVillage.com, XYZ, PDq.]

Whenever I priced out loans with PMI versus 1st and piggyback, the combo loan always won out. But now... as the 2nd and helocs head into never never land, PMI should be on the rise (we witness the rise of the insurers whenever fear sets in... they're very very good at determining real risk versus perceived risk so it will be interesting to see how they underwrite new home mortgages, commercial mortgages, and every other insurable "asset." They'll write a ton of new business, I'm sure... collect a lot of "cash is king" upfront or near term profits, and assure everyone that they're AAA+ rated... or get a Moody's or S&P to do that for them. Then 6 months before the massive claims hit, watch for shorting of their stocks and golden parachutes filling the skies while everyone reassures us that the "free market" is adjusting and "clearing"). imho. Take a look at AIG's board for some interesting characters - one for example, happens to be CEO of the National Bureau of Economic Research. Take a look at their execs for more interesting bathroom reading. Ubi Sunt?

[Steven Moshlak]

Chairman Bernanke, where's the inflation? I read the Federal Reserve's reports and I am looking at what is going on. Maybe from an Economist's textbook point of view there (emphasis added), may be merit to the Fed holding the line on inflation, in which inflation (as in the 70's and 80's) hasn't appeared. Take a long look at the rise in the price of fuel / petroleum and it has had minimal impact on prices.

Jim Cramer may be onto something. Prior to your becoming the Chairman of the Federal Reserve, Alan Greenspan tried to ratchet-up the Fed-Funds rate in order to control "irrational exhuberance" within the markets. The only thing that Mr. Greenspan succeeded in doing was causing a slew of start-up companies to declare bankruptcy and substantially increase the unemployment factor. After realzing the impact, it was "too little, too late" and even when the board reduced the Fed Funds rate, through telephone conferences in between the formal FOMC, th economy was in a downward spiral.

After hitting rock-bottom, Mr. Greenspan tried the "measured-pace" approach to increasing the Fed Funds rate, in order to stave-off potential, again potential inflationary concerns. Since jacking-up the Fed Funds rate, it has remained at its present state of 5.25% since your administraion. The problem is that where the world economy may be gaining, the home-front is going in a down-ward spiral. When we went to college for our undergraduate degrees, the mortgage industry did not have ARM's or "boutique mortgages."

Did people overextend themselves? With the foreclosure rate at its current rate, I'd say yes. People aren't spending as much, since most of it goes to the mortgage or to the gas tank, these days. But here in the throughout the world, we have something known as the "American Dream." People don't come to the United States, because they have such a "dream" in their country.

So, they talk about a "bail-out" of the mortgage industry. I strongly disagree and we as Americans need to look at the picture with the nuances that have taken place since Milton Friedman, John Maynard Keynes or Arthur Laffer put forth their theories on Economics. Americans don't need a hand-out, but on occasion maybe a hand-up. The economy was really moving along when the Fed Funds rate was at 3.25%. As my father used to say, "Why fix it if it works?" Well, the squeeze is and has been on and even with my knowledge of economics and price theory, we need to focus on those seeking to maintain the "American Dream." The last thing we need is an implosion in which the Federal Reserve won't be able to recover without drastic or draconian action(s).

I therefore conclude with the following example. The "Fed Funds" equivalent in Japan was nearly at 0% for five years. When Americans starting buying Prius' and othe Japanese hybrids, the economy soared and they have raised their rates accordingly. Let's not end-up like Japanese Central Bank and really upsetting the economy.

[MBwatcher]

Were there to be a Fed cut (next month, which seems like forever), do we really think that will translate to easier credit for home buyers?

What's the evidence that mortgage rates can divert substantially from the "guidance" provided by falling Fed rates?

[BetterVillage]

Steven: Why appeal to Bernanke and what do you think "we" should do? Consumers can moderate themselves, institutions can moderate themselves, but they don't seem to for the most part unless forced to. The free market that so many seem to think will sort things out has been proven to be ripe for the pickin' by those that can easily game the markets. And they are light years ahead of any laws that might be written to give the impression that they are being reined in.

Maybe we need a council of "elders" (what Pete Viles interpreted previously as a "blue ribbon commission") Folks who are proven to be unconnected to partisan politics, that have no interest in anything whatsoever other than running this country like a swiss watch, and have the bona fide credentials to do this... economists, environmentalists, military strategists, physicians, quantum physicists, historians, et al. Carnivorous capitalists will of course be averse to this because they feel like they must dominate others in order to create a pleasant life for themselves and their friends and families... but they still don't get that they're going to be devoured themselves by the ultimate top-feeders until all that's left is something the top feeders really won't enjoy very much. This is not a kum-ba-yah issue.. it's a national priority in my very humble opinion. Do we hide the truth about our society like the chinese seem to be doing all the time? Do we rely on our current or up and coming crop of politicians to guide us through? Are any of of them strong enough to not get bought and sold?

[TA Webster]

PORTFOLIO POLLUTION_FIRREA helps lenders - not buyers! So much of the headlines today talk about the mortgage mess and how countless numbers of borrowers are nearing foreclosure. Sure, the government and Treasury Secretary Paulson have made efforts to curb the rising tide of foreclosures for all borrowers in financial trouble (not just sub-prime) and that's a great start. But how in the world did housing prices rise to such an astronomical level in the first place? Who fell asleep at the wheel regarding over-inflated real estate appraisals? Did regulation created under the Financial Institution Reform, Recovery and Enforcement act (FIRREA) created after the Savings and Loan crisis do more to help lenders loan money and almost nothing to protect borrowers from overpaying - YES!

[TA Webster]

*Lenders controls the entire appraisal process from beginning to end using their preferred vendors (wink wink). FIRREA gave way to AVM's and they are a flat joke! Do you know how many local appraisers went out of business due to AVM's. Answer: a lot!

Why: because 'AVM's' cleared out anyone in the business that challenged over-valued loan amounts given to them in advance (aka target price) by the client who ordered an 'appraisal'. Banks and lenders are totally driving the bus on property valuation and that should be changed immediately!

*Like a bank that leaves the vault open, lenders are "surprised" that home values are inflated and property conditions mischaracterized. What rational person or entity lends without knowing the collateral's value? Lenders do business exactly this way.