Mortgage defaults growing

World's largest insurer, in a presentation on subprime exposure, says total delinquencies in its real estate portfolio at 2.5 percent.

NEW YORK (CNNMoney.com) -- 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 (Charts, Fortune 500) said total delinquencies in its $25.9 billion mortgage insurance portfolio were 2.5 percent.

It 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.

More than 2 million hybrid adjustable rate mortgages (ARMs) come up for reset this fall - peaking in October with more than $50 billion due.

Borrowers who took out hybrid ARMs in 2004 and 2005 to secure low "teaser" rates for the first two or three years of the loan may see their monthly mortgage payments climb by 35 percent or more.

Foreclosures could explode, which would hurt everyone on the food chain: Borrowers lose their homes; lenders lose their payments; local governments lose tax base; and neighborhoods lose resiliency.

The already poor performance of many mortgage loans will worsen substantially through the rest of the year, according to an analysis in late July by Moody's Economy.com.

The company predicts that 2.5 million first mortgages will default this year, with little chance for improvement soon - Economy.com expects delinquencies to peak in the summer of 2008 at 3.6 percent of all outstanding mortgage debt, up from 2.9 percent during the first three months of 2007.

The worst-hit loan category will be subprime adjustable-rate mortgages (ARMs). Economy.com expects foreclosures for those loans to hit 10 percent of that group by mid-2008. The foreclosure rate for that group is currently 4 percent and was as low as 2.5 percent in 2005.

Subprime ARMs issued during the last three months of 2006 could fare worst of all, with a projected foreclosure rate of just under 20 percent during the fall of 2011. That would mean a full one in five owners still paying off subprime ARMs from late 2006 - about 12,000 in all - would lose their homes. Many others from that group would have already lost their homes to foreclosure in the previous years.

One-time, high-flying markets will suffer the most. California's Central Valley is particularly vulnerable, according to the study. Other hard-pressed areas cluster in Florida, Nevada, New York, Arizona and the District of Columbia.

The delinquency increase will be sparked by two main factors: Falling home prices and rising interest rates on adjustable mortgages

(http://money.cnn.com)