AIG's mortgage bet: Deja vu all over again?

The bailed-out insurer plans to invest directly in mortgages and real estate as it searches for yield.

By TheStreet Staff Nov 14, 2012 1:10PM

thestreet logo Miniature home on sheet of percent signs copyright Comstock, Getty ImagesBy Shanthi Bharatwaj


Bailed out insurance giant AIG (AIG) has spent the last four years shedding its risky, non-core businesses and returning to its roots as an insurance company.


Now with a complete government exit in sight, the company is ready to spread its wings once more. And it's looking to expand in the very area that led to its unprecedented bailout in 2008: mortgages.


According to a Reuters report, the insurer plans to go beyond merely insuring home loans.


"We are also now looking at ways we could become direct investors in mortgages," CEO Robert Benmosche told Reuters. "We are going to do more of our own direct lending, both commercially and residentially."


Benmosche said during the earnings conference call earlier this month that AIG's mortgage insurance arm United Guaranty gives it tremendous insight into the asset class.


Struggling with a low-yield environment, AIG has in the past year expanded its portfolio of residential and commercial mortgage-backed securities. It has also expressed an interest in investing directly in real estate.


"The policies of the Fed are telling us that we're going to see low interest rates for a long period of time, and we're going to have to figure out how to manufacture our own yields," Benmosche said at a recent conference, according to Bloomberg. "We have to accept long-term investing, like we did in the good old days. That means real estate."


The company is looking to invest $50 billion in assets such as real estate to generate above-market returns.


AIG's re-entry into mortgages is a scary prospect, as investors are left wondering if the insurer will get its bet on mortgages right this time. Investing directly in real estate means its portfolio will become less liquid, which raises the company's risk profile.


The expansion into mortgages will also subject it to increased supervision from the Federal Reserve. AIG probably reasons that it is already under Fed supervision because of its savings and loan business and because it expects to be classified as a non-bank SIFI.


But its expansion into mortgages could lead to increased scrutiny from the regulator. Notably, Metlife (MET) is exiting the business of mortgage origination and servicing precisely to reduce oversight by the Fed after its plans to return capital were rejected earlier this year.


AIG's return to mortgages might be a signal that it is ready to embrace innovation once more.

The company recently unveiled its new "Brand promise" called "Bring on Tomorrow."


But its expansion into mortgages feels dangerously close to yesterday.


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