Spreding defaults on mortgage

AIG warns of spreading defaults

The HQ of American International group

NEW YORK: American International Group, one of the biggest US mortgage lenders, warned on Thursday that mortgage defaults are spreading.

While saying most of its mortgage insurance and residential loans were safe, AIG made a presentation to analysts and investors that showed delinquencies were becoming more common among borrowers in the category just above subprime.

Although acknowledging the “significant declines” in subprime securities, chief executive Martin Sullivan said AIG’s tight underwriting standards had minimised losses and he was “poised to take advantage of opportunities” in the mortgage market.

But it was clear the overall market was getting worse. “We are experiencing stress in the Midwest markets where jobs have been lost and we are now seeing it in Florida and California,” said William Nutt Jr., chief executive of AIG’s mortgage insurance arm.

“The market’s in a panic mode because the subprime crisis is spreading into other areas of the economy,” said Bill Hackney, a managing partner of Atlanta Capital Management.

But Hackney said he was keeping AIG as one of his largest holdings because it had “the size and diversity to weather it.”

On Wednesday, AIG reported second-quarter earnings that included a pre-tax operating loss of US$78mil in its mortgage insurance unit and a drop in earnings at its consumer finance division, which originates and invests in real estate loans. But higher premiums in life and property insurance offset the drop, and net earnings rose by more than a third to US$4.28bil, or US$1.64 a share.

AIG said delinquency rates for first mortgages had risen to 3.98% in June from 3.56% in April and a low of 3.08% in July 2005. First mortgages represent 90% of AIG’s domestic mortgage business.

“You never have credit problems isolated to just one area,” said Paul Newsome, an analyst with A.G. Edwards.

The loss ratio for first mortgages, which represents claims and expenses as a percentage of premiums, more than tripled in the second quarter to 84% from 26% a year earlier. The total loss ratio – including second mortgages – nearly quadrupled to 130%.

As of June 30, AIG’s consumer finance arm had delinquencies of 3.68% in subprime, 2.13% in nonprime, and 0.81% in prime.

AIG, the world’s largest insurer, said total delinquencies in its US$25.9bil mortgage insurance portfolio were 2.5%. A year earlier, that portfolio totalled US$23.6bil with a delinquency rate of only 1.9%.

It said 10.8% of subprime mortgages and 4.6% in the category with credit scores just above subprime were 60 days overdue. – Reuters

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