Two aggrieved bond insurers took to the offensive yesterday, answering claims made by Moody's Investors Service Tuesday that further deterioration in second-lien mortgage securities could put pressure on the bond insurers' capital levels.
Both MBIA Inc. and Ambac Financial Group countered Moody's claims with detailed explanations of their relevant exposures and assurances that the current capital levels are adequate for covering any losses in the direct residential mortgage-backed security part of their portfolio.
On Tuesday, Moody's said worse-than-expected losses in second-lien mortgage securities created between 2005 and 2007 could jeopardize the ratings of the bond insurers with the most exposure to these assets, like MBIA and Ambac.
The parent companies for MBIA Insurance Corp. and Ambac Assurance Corp. said there are significant differences between those exposures being reviewed by Moody's and those held by the bond insurers. Ambac said it has no exposure to subprime borrowers, as the average credit scores for borrowers within pools that Ambac has guaranteed range from 695 to 745. In general, borrowers with FICO scores of 660 or lower are considered subprime.
"There are significant differences between subprime second-lien pools referenced in Moody's report and the prime second-lien securitizations we have guaranteed," MBIA said in a statement.
Both bond insurers said they have examined individual deals in their portfolio as a way to calculate the amount of reserves needed to cover potential losses. MBIA said it is comfortable with its current stress analysis, while Ambac said it believes it has already exceeded Moody's stress case targets.
In some cases, both MBIA and Ambac said they have sent back to the originator those loans that do not meet the criteria for being prime credits, further strengthening their portfolio, the bond insurers said.
Both bond insurers admitted in their responses that some deals could experience high degrees of loss. MBIA said some deals could experience losses greater than 40%, while Ambac said it has already set aside reserves for its worst performing home equity lines of credit and closed-end second transactions.
Ambac has $4.6 billion in exposure to credit enhancement securities and $8.8 billion of exposure to home equity line of credit loans that were originated between 2005 and 2007. Seven CES transactions worth $2.1 billion and seven HELOC transactions amounting to $2.2 billion have already been downgraded to below investment grade and had reserves set aside, accordint to the insurer. The rest are performing within expectations and remain investment grade, Ambac said.
"Ambac fully agrees that performance varies greatly and has appropriately reserved for its under-performing transactions," the company said. "The stress we are experiencing within each of these portfolios is limited to a relatively few transactions. The remaining transactions in both asset classes are performing within expectations and are internally rated investment grade."
MBIA said its weighted average of total losses to date is about 3.5%.
Both insurers' comments compare to the newly calculated losses from Moody's, which range from 17% of loans made in 2005 to 45% for loans made in 2007. MBIA said it expects Moody's to take these discrepancies into account when it analyzes the company's portfolio.
Moody's said it was reviewing the portfolios to see if the deterioration could be "material" for those financial guarantors. Analysts at CreditSights, a research firm, think the review could lead to potential downgrades.
"We feel that Moody's hard-line stance and suggestive comments could be a signal to the market that a review for a possible downgrade may be in the works again," said a recent CreditSights note.
MBIA said it did not believe its capital requirements had changed, or that they should change.
"We are not aware of any changes to capital requirements for our deals nor do we believe any is warranted based on deal performance or expected losses," the company concluded.
