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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum

GLD 374.94

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Nov 19 4:00 PM EST

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To: Elroy Jetson who wrote (32570)	4/8/2008 1:08:55 PM
From: Lazarus_Long	Read Replies (1) of 217879

Thanks, Elroy. That clears up a lot. Mortgage insurance is an entirely separate deal from banks and government insurance for bank depositors. I knew that. I was wondering if the low-end loaners werwe simply not requiring it, then getting into trouble when a large number of defaults occurred because of a recession (you can see an increase in lender failure during the '91-'92 recession in one of my earlier posts). The Muni bond business is very sound, and the business of selling mortgage insurance to borrowers is sound, although if the real estate down-turn is especially severe it will wipe out the shareholders in these firms. There were rumors of trouble in the muni market earlier, but they seem to have come to nothing. The problem business was selling default insurance to investors on collateralized mortgage bonds and credit swaps. There is a strong possibility that the premiums charged on these policies will be insufficient to pay off losses. So the REAL problem is not the subprimes directly, but mispricing of default insurance on derivatives of them, similar to the previous underestimation of the damage that could be done by hurricanes and the huge, almost-bankrupting payments insurance companies had to make after some of them. These firms are prohibited from transferring assets between subsidiaries to contain the problem. When these bonds and swaps default, the insurance companies are obligated to pay only the currently due payments to the investors. So any default by the insurer will occur many years in the future. Why did AMBAC and MBIA already get in trouble? By 'due payments', I assume you mean the payments that should have been made on the mortgage by the homeowner? How long does this obligation on the insurance company continue,or does it depemnd on the policy? Whether the insured investors ultimately sustain a loss depends upon the overall loss rate on insured mortgage bonds and credit swaps. These investors are located around the world. So we've found out. :-) .

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