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As we discussed the other day in our post about MBIA’s $2.4 billion quarterly loss, the bond insurers are seemingly sitting on the edge of a cliff waiting for loan performance to deteriorate to a tipping point that pushes these companies in to insolvency. Warren Buffett himself questioned the business models of these bond insurers (PDF) who have taken very ‘thin’ positions in terms of exposure to mortgage risk.
This risk is particularly high in the second-mortgage insurance business as now many second mortgages are essentially non-collateralized loans against properties that are now valued at far less than when the original second-mortgage lien was written.
Moody’s apparently feels the same way as they have issued fresh warnings on the ratings of bond insurers. While this presentation on the bond insurers seems to point to plenty of reasons for concern MBIA is (of course) protesting the warnings.
From Market Watch:
Poor performance of second-lien residential mortgage-backed securities could put pressure on the credit ratings of bond insurers, Moody’s said on Tuesday.
But there are “significant” differences between the subprime second-lien mortgage securities that Moody’s is worried about and the prime second-lien mortgage securities that the bond insurer has guaranteed, MBIA said.Moody’s also said Tuesday that higher-than-expected losses on these types of securities could affect the amount of capital that some bond insurers need to keep their all-important AAA ratings.
MBIA countered that it’s unaware of any changes to capital requirements covering the securities it has guaranteed. “Nor do we believe any is warranted based on deal performance or expected losses,” the New York-based company said in a statement.
