Not Looking Good!

Via Bernhard:

Yuck!

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.
Mortgage defaults growing

Lets take a step back and look at the feed back lopes here.

A peak "resets" of the adjustable rate mortgages, after which the borrower has to pay more interest, is expected for this fall. After that mortgage delinquencies rates will move even higher as people will recognize that they can not pay the houses they bought.

The foreclosures will come and a glut of houses will hit the real estate markets at a time where risk premium on interests will increase and borrowing standards will be more stringent. There will be no buyers for these houses. House values will sink further and more people will default. A positive (self enforcing) feed back loop.

On the lending side the mortgages have been packed into mortgage backed securities and repacked into collateralized debt obligations. These were certified by rating agencies as having a certain "risk class" and value. The rating agencies are payed by the issuer of such securities and use "mathematical" models to determine value and risk.

One can assume that some moral hazard was involved here and some double A or triple A rated papers are in reality of B-- quality.

Where all the misrated MBSs and CDOs of the last years ended up is unknown. But anything labeled "money market fund" or such can be suspected to have at least some of them.

I love Bernhard as he always brings up such a cornucopia of topics for discussion and he and his commentators usually are a pretty good representation of the European mind. The one thing that does bother me though is that his posts are so often filled with typos and misspellings. It really takes away from the genius of his posts. But maybe, it is all just in the translation. German to English that is!

None-the-less, he brings us a perspective that is very valuable and truly appreciated. You go b.

My question is why is this situation being treated as if it is surprising?