Inflation And The US Dollar

I would say you're good for the bank, because you're covering your monthly. (Unlike a growing segment of recent homebuyers)
Not to mention, mort payments cover the interest first, principal second. So the bank sees their return upfront, and on time in your case. As Fred suggests, I think every bank has figured in the devaluation of principal due to inflation. In many cases, banks will see neither interest nor principal on the morts they issued--and with too little default risk-reserves, this is causing the real illiquidity problems.

A lot of bad-risk morts were handed off to other entities, even in the "prime" category. I spoke about this issue with our bank, and they admitted they sold off the sub-prime to others. But they held our fixed-rate prime mortgage--probably because it was less risky. That said--I'm not in banking/morts/finance, so I don't know the whole picture, thankfully!

Peter,
Don't you guys already drive on the wrong side?
That's were AIG comes into the picture. They insure these mortgages. Their problem was the rates they were charged. AS the people they were backing got worse, their rating D&B when down. So they had to cover more of the margin. They didn't have the cash, so oops.

I love the 'inflated' dollar. Too funny!

Actually here in the US - the government does not affect the interest rate. That is done by the FED (federal reserve). They are an independent group. It is made up of a board and chairman (appointed by President for life - can't be kicked out). The FED assigns the 'prime rate' (rate at which banks can borrow against FED). The FED uses this mechanism to control the money supply. Banks then arrive at their interest rate off the FED rate.
There is also the World Bank --- OHHHHHHHHH my brain hurts again

That's not exactly what happened to AIG. Insurance companies take the premiums they receive & invest them. Most insurance companies have a couple profit centers, one is the difference between what comes in as premiums & what goes out as claims, the other is the investment profit they make on the money they hold.

AIG decided they could make a larger profit by taking on more risk on the money they invested, mainly by putting it in credit derivatives & the like. As the current crisis has unfolded those investments lost most of their value. That loss of value meant they no longer had sufficient assets to cover their obligations or reserve requirements.

I'm not a financial genius but I have been trying to make sense of what is going on. What a lot of people don't seem to realize is that this problem is not confined to subprime mortgages. There are a lot of people that kept refinancing their property at the low interest rates, taking out extra cash to buy luxury goods, remodel their homes, take vacations, etc.

Many of those people got variable rate mortgages, some in excess of the homes actual value, thinking homes would appreciate enough that they could refi again to keep their payment low. Real estate values couldn't keep expanding & have gone down, and interest rates are slightly higher. These people have great credit & decent incomes, but when their interest rates reset at the higher rate their lowered home value will not allow them to refi. At that point they must come up with a higher monthly payment amount or face foreclosure.

The bottom line is that those of us who didn't benefit in any way from all of this will end up paying for it. This will be through our tax dollars, & also by investment losses, lowered purchasing power of our saved dollars, & inflation.