The ABCs on AIG

The U.S. Governments bailout of of insurance giant AIG along with the selloff of Merrill Lynch and the collapse of Shearson Lehman have been in the news this week. But what does it mean to us local folks?

Well, if you had stock in AIG there is a small chance that your stock will become next to worthless (perhaps 20 cents on the dollar). The bankruptcy of Shearson Lehman pretty much wipes out equity shareholders as well.

But what does it mean for folks buying homes?

Well, in the past when a homeowner took out a loan with ABC Bank and Trust, that loan stayed with ABC Bank and Trust until it was paid off, often after 30 years. But in recent years, banks had a habit of collecting up all these different loans and packaging them, then selling them to outside investors.

In the case of Wells Fargo, they got into the business of originating, packaging and then servicing the loans. Their risk was dropped substantially while they collected fees for accepting your payments.

Unfortunately, many of these packaged loans were either sold to or through large investment houses like Shearson Lehman and Merrill Lynch. And often insurance carriers like AIG would be the proud owners of vast quantities of commercial properties (think shopping malls). Much like residential properties, the commercial properties have also experienced massive value losses and the resulting foreclosures.

As early as a year ago, loan originators suddenly found themselves unable to sell their home loans to brokerage houses so they stopped making loans altogether. Because the loans were already made, many of the originators slipped into insolvency as they never had the money to make the loans in the first place!

So if your not a stockholder, do you care? You should! From now on and into the future it will be alot harder to obtain a mortgage, especially if your credit is bad. And folks who were counting on refinancing their ARM loans that were due this year might just be out of luck.

Stay tuned for wave 3 of the foreclosure game.