American International Group, the insurer that was rescued by the U.S. government in 2008 after soured bets on mortgage securities, is building a unit to buy individual home loans amid a rebound in the housing market.
AIG plans to buy loans backed by its United Guaranty Corp. unit, the largest seller of traditional private mortgage insurance last year, according to Donna DeMaio, 54, the unit's chief executive officer. The debt will be held as long-term investments by AIG insurance companies.
"You're cutting the middle man out of the securitization process," DeMaio said, referring to bonds that package home loans. The yield on an individual mortgage "is better than if you just bought the paper backed by the whole loan."
AIG CEO Robert Benmosche, 68, said in October the New York- based firm has to find ways to boost returns as the Federal Reserve keeps interest rates near record lows, reducing bond yields. He's also positioning the firm to benefit as the U.S. cuts its role as the largest financier of new loans for American home buyers. Edward J. DeMarco, the Federal Housing Finance Agency's acting director, said this week that he wants to expand the private market for mortgages by shrinking government-owned Fannie Mae and Freddie Mac.
AIG's program is "dovetailing very nicely with what's going on in the market," DeMaio said yesterday in a telephone interview.
The new unit, Connective Mortgage Advisory Co., will evaluate loans made by other lenders for purchase by AIG, said DeMaio, who joined the insurer last year and previously ran MetLife Inc.'s bank. Connective, part of Greensboro, North Carolina-based United Guaranty will use data compiled by the mortgage insurer to help AIG determine which loans to buy. It won't originate loans or bundle them into securities.
"Let's use the expertise within United Guaranty to look at the loans we're already insuring to see if purchasing some of those loans makes sense for the AIG portfolio," DeMaio said.
AIG has boosted investment in U.S. property markets less than five years after real-estate wagers forced the government to rescue the insurer, once the world's largest. The Fed had to step in after AIG sold derivatives to banks protecting them against losses on housing debt, with the U.S. bailout reaching $182.3 billion.
Benmosche's firm last year bought $7.1 billion of mortgage- related securities from Maiden Lane III, a vehicle created by the Federal Reserve Bank of New York to help save AIG. The company has advanced 26 percent in the past year as the insurer sold units and repurchased stock to help end the bailout.
Benmosche has said AIG needs to cut reliance on Wall Street and increase control over the risks the company takes with its investments as part of a strategy to generate better returns. The CEO said at an industry conference in October that AIG may pursue direct investing in real estate.
"We're going to have to figure out how to manufacture our own yields," Benmosche said at the conference. "It's making sure that we are taking control of the risks we're going to put on our books, and we can't rely on the public markets."
AIG invests cash it receives from selling insurance policies in assets such as stocks and bonds. The $376 billion portfolio included $36.1 billion of residential mortgage-backed securities and $12.4 billion of commercial mortgage-backed bonds as of Dec. 31. The firm also has $13.8 billion of direct commercial mortgages and $3.2 billion of investment real estate.
AIG purchased its first residential whole loan last month under the new initiative and Connective is initially hiring about 15 people, according to DeMaio. The insurer will purchase conforming loans and may eventually buy jumbos, or those too big for government programs, she said.