MBIA Insurance Corp. is at greater risk for a credit downgrade than first expected, Moody’s Investors Service said yesterday. The rating agency said in an update of its ongoing review of the bond insurers’ subprime mortgage exposure that MBIA is “somewhat likely” to have a capital shortfall, after saying in a Nov. 8 report that the company was unlikely to fall below capital adequacy thresholds in stress testing. A final version of Moody’s review will be available within the next two weeks, the rating agency said.“Additional analysis of its direct [residential mortgage-backed securities] portfolio leads Moody’s to believe the guarantor is at greater risk of exhibiting a capital shortfall than previously communicated,” the agency said. “We now consider this somewhat likely.”Moody’s update also reiterated its views on the likelihood that other insurers will be negatively affected by the review process. It also said it sees a “somewhat likely” chance that its review will show that Financial Guaranty Insurance Corp., Security Capital Assurance Inc., and Ambac Assurance Corp. have a capital shortfall.The Moody’s report did not clarify which aspects of MBIA’s RMBS portfolio had heightened rating analysts’ concern. The analysts yesterday declined to comment further on their report, according to Moody’s spokesman John Cline. Other credit and equity analysts speculated that MBIA’s exposure to $17.7 billion of home equity line of credit and closed–end second RMBS written in 2006 and 2007 might be at issue.“Despite being a strong asset class historically, HELOCs have emerged as a weak spot of late,” wrote equity analyst Heather Hunt of Citi in a Wednesday afternoon report to clients. She added that MBIA and competitor Ambac only insured HELOCs with prime quality buyers.“Structurally, the lender has no recourse against the borrower in the event of a default, other than that a default hurts a borrower’s FICO score,” Hunt said. “By contrast, defaults on first-lien mortgages would result in the borrower filing for bankruptcy and having the home foreclosed.”Moody’s said that CIFG Guaranty is still at the greatest risk of a capital shortfall. “Based on further analysis conducted since early November, we continue to believe CIFG is most likely to fall below Aaa capital benchmarks, though they have announced a capital enhancement plan which would significantly reduce that risk,” it said.In its update, Moody’s outlined its process of reviewing the industry. The three key factors being considered to determine potential rating actions are the companies’ current capital adequacy, their potential for raising capital in the near-to-medium term, and the strength of their franchise and business model in the future.In its final report on the industry review, Moody’s will either affirm a company’s rating, put it under review for a downgrade, or drop the rating outright. An actual rating drop will only be leveled if a company does not have enough capital and Moody’s does not think that company’s plan to raise capital is reliable.

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