Bond insurers try to back out of $125 billion in mortgage guarantees

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

AMBAC, MBIA and FGIC are trying to unwind $125 billion in contracts written to insure subprime mortgage debt with banks across the country as the mortgage insurers try to recover from the beating they’ve taken during the housing bust. Since the big bond insurers ratings have been cut on capital concerns they are working quickly to try to mitigate exposure to future losses by taking some upfront cost to get out of the details.

From Market Watch:

Bond insurers, including Ambac Financial Group, MBIA Inc. and Financial Guaranty Insurance Co., reportedly are trying to unwind $125 billion of guarantees they sold on risky debt securities.

MBIA, Ambac and FGIC are talking with banks about “commuting” these insurance contracts, which were sold in the form of credit-default swaps, a type of derivative that pays out in the event of default, the Financial Times reported on Monday.

The contracts guaranteed payments on collateralized debt obligations — complex debt securities often backed by mortgages that have plunged in value amid a recent wave of foreclosures.

MBIA lost their AAA ratings from Moody’s Investors Service last week, while FGIC was cut to junk status by the agency. Without top ratings, bond insurers can’t sell new guarantees, while policy-holders such as banks and big brokerage firms see the value of the contracts they previously bought drop in value.

That has added a renewed sense of urgency to the talks on commuting the contracts, the newspaper reported.