Wilmington Finance: A Division of AIG

Wilmington Finance was a subprime mortgage lender that operated as a division of American International Group (AIG). Founded in the early 2000s, it specialized in offering home loans to borrowers with less-than-perfect credit histories, often categorized as “B,” “C,” or “D” credit. This market segment, while potentially lucrative, carried a significantly higher risk of default than traditional prime mortgages.

The company rapidly expanded its operations during the housing boom of the mid-2000s, fueled by readily available capital and a seemingly insatiable demand for homeownership. Wilmington Finance aggressively marketed its mortgage products, focusing on borrowers who might not qualify for conventional loans. These products often included features like adjustable interest rates (ARMs), low introductory “teaser” rates, and minimal documentation requirements. These features made the loans initially attractive but also exposed borrowers to substantial risk when interest rates reset or housing prices declined.

Wilmington Finance’s business model, like that of many other subprime lenders, relied heavily on securitization. This involved packaging mortgages into mortgage-backed securities (MBS) and selling them to investors. By offloading the loans to investors, Wilmington Finance could free up capital to originate even more mortgages, further fueling its growth. AIG, as the parent company, provided substantial financial backing and access to capital markets, enabling Wilmington Finance to significantly scale its operations. However, AIG also insured many of these mortgage-backed securities against default, using credit default swaps (CDS). This critical detail would later play a significant role in the 2008 financial crisis.

As the housing market began to cool in 2006 and 2007, delinquencies and foreclosures on subprime mortgages began to rise. This put immense pressure on Wilmington Finance, as increasing numbers of borrowers struggled to make their payments. The value of the mortgage-backed securities backed by these loans plummeted, leading to significant losses for investors and AIG. The credit default swaps AIG had sold to insure these securities also began to require payouts, creating a massive liability for the company.

The collapse of the subprime mortgage market and the subsequent financial crisis of 2008 brought the role of Wilmington Finance and its parent company, AIG, into sharp focus. The government ultimately intervened with a massive bailout of AIG to prevent the collapse of the entire financial system. The repercussions of Wilmington Finance’s lending practices, along with those of other subprime lenders, contributed significantly to the crisis and highlighted the dangers of excessive risk-taking and inadequate regulation in the financial industry.