Subprime Default Problems Spread
As subprime loan default problems spread into what once were considered “safe’ loans the prospect of increased housing loan defaults and housing foreclosures hit stocks hard. The Dow was down 387.18 points in what was the second worse sell off of the year.
As I have been saying for some time the sub prime housing loan market disaster has the potential to bring about financial havoc world wide. Do not underestimate how bad things can get.
Today , August 29, 2007 was indeed another rough day on the subprime front. AIG, the world’s largest insurer and one of the biggest mortgage lenders, said residential mortgage delinquencies and defaults are becoming more common among borrowers in the category just above subprime.
France’s biggest listed bank, BNP Paribas, froze $2.2 billion worth of funds, citing subprime woes. And the European Central Bank felt it had to inject $130.5 billion into euro-zone money markets to help calm jittery markets.
AIG said total delinquencies in its $25.9 billion mortgage insurance portfolio were 2.5 percent. AIG said 10.8 percent of subprime mortgages were 60 days overdue, compared with 4.6 percent in the category with credit scores just above subprime, indicating that the threat to the mortgage market may be spreading.
While maintaining that it is “comfortable” with its mortgage exposure, AIG gave a gloomy assessment of the market in a presentation to investors and analysts.
It said delinquency rates for first mortgages had risen to 3.98 percent in June from 3.56 in April and a low of 3.08 in July 2005. First mortgages represent 90 percent of AIG’s domestic mortgage business.
AIG divided its mortgage portfolio into three categories: subprime, for borrowers with credit scores below 620; “non-prime,” for borrowers with credit scores between 620 and 659; and prime, for borrowers with credit ratings above 660.
As of June 30, AIG’s finance arm, which originates first and second mortgages, recorded delinquencies of 3.68 percent in subprime, 2.13 percent in non-prime, and 0.81 percent in prime.
Smart investors are now selling into the rallies and hoping that they can distribute most of their holdings before the real panic begins. If you are still hoping for the best and holding onto your stocks perhaps you should reexamine your holding strategy.
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[...] risk of an old fashioned destructive credit crunch seems to be growing with the disclosure by AIG insurance company, the worlds largest lender, that late mortgage payments are spreading from the subprime loan market [...]