The growing amount of cash that MBIA Inc. expects to see in the coming years from mortgage loan putbacks could boost the company’s balance sheet by billions of dollars, according to a third-quarter earnings conference call Wednesday. That could help restore its ratings so it could begin writing new insurance policies, but ongoing litigation contesting its 2009 ­restructuring continues to hurt the company’s outlook.

“Putbacks” refer to cash assets MBIA expects to recover from mortgage-loan originators who agree, or are forced, to repurchase faulty loans that formed the basis of MBIA-insured mortgage-backed securities.

MBIA has been involved for about two years in a series of battles to recover billions of dollars from a number of financial institutions, which it says deliberately misled the insurer into guaranteeing assets that turned toxic.

Early in the third quarter, MBIA was able to recover, through negotiation, a net $50 million of putbacks from an unnamed counterparty.

That transaction helped boost the company’s confidence in future recoveries. In its third-quarter earnings release, MBIA increased the total amount of putbacks it expects to recover by $131 million, to $2.2 billion.

Assured Guaranty Ltd., reviewing its third quarter last week, said it obtained commitments to repurchase $111 million of loans. Assured has reviewed $5.3 billion of loan files and identified $4.7 billion of contract breaches which could result in putbacks.

Jay Brown, chief executive at MBIA, told investors Wednesday in a conference call that the $2.2 billion figure “relates to about $4.3 billion of incurred loss on the deals for which we are reflecting those putbacks.”

Brown expects the probability of a full recovery to increase as court battles move forward. The overall potential for putback recoveries is also anticipated to rise as MBIA reviews additional loan files.

“We have seen a large number of the originators and underwriters of mortgage securities have acknowledged a greater involvement in potential putback liabilities in terms of their estimates,” Brown said.

Since MBIA took legal action to get banks to repurchase faulty loans in fall 2008, similar putback cases have been filed against financial institutions by Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Reserve.

CreditSights earlier this year called the expected recoveries “a potential game changer” in MBIA’s quest to remain a viable entity.

Analysts at JPMorgan estimated last month that large banks may have to repurchase between $55 billion and $120 billion of loans in the next few years. Most of that cash would be recouped by Fannie Mae and Freddie Mac. According to James Eck, a senior insurance analyst at Moody’s Investors Service, the final amount heading to bond insurers “could certainly go much higher than $10 billion.”

MBIA has two trials scheduled for next year to debate the interpretation of the contracts with the loan originators. Meantime, it is simplifying its corporate structure and reducing its exposure to other risky assets by paying counterparties to tear up certain contracts.

Those moves helped MBIA, a bond insurance holding company, to post a net loss to shareholders of $213 million last quarter, versus a $728 million loss in the same quarter one year ago. MBIA executives said the smaller loss reflects decreasing volatility in its insured portfolio owing to loss mitigation strategies.

“We believe we’re well positioned to handle expected loss scenarios,” chief financial officer Chuck Chaplin said Wednesday. “There are potentially serious headwinds if the economy does not get any better or turns down again, but adverse volatility in our book does appear to be declining.”

Each of these steps is aimed at one goal — rehabilitating the company so it can begin writing new insurance policies.

But MBIA’s municipal bond insurer, National Public Finance Guarantee Corp., is unlikely to conduct new business until litigation contesting its creation in February 2009 is resolved.

NPFG was created when MBIA divided its healthy public finance portfolio from its riskier structured finance portfolio — which included transferring $5 billion of cash and securities to NPFG.

Banks contesting the split contend the decision, which was approved by the company’s regulator, the New York Insurance Department, severely diminishes MBIA’s claims-paying abilities for its non-muni obligations.

MBIA remains confident the NYID’s decision will be upheld and it is hopeful the litigation will be resolved early next year.

However, its reliance on the NYID may have hit a hurdle last week when James Corcoran, superintendent of the NYID from 1983 to 1990, submitted an affidavit on behalf of petitioners, in which he called  the approval process rushed, deficient, and unfair.

“The stated public policy reason for the department’s approval of the transformation — the reinvigoration of the municipal bond market in New York and nationwide — was not within the statutory mission of the department and did not justify the department’s violation of its paramount duty to protect and treat fairly and equitably the interests of all existing policyholders,” Corcoran told the New York Supreme Court on Nov. 4.

He called the transaction “adverse to the interests” of MBIA’s structured-finance policyholders, and said the company restructuring “creates a dangerous precedent” for policyholders of other insurance companies.

“By allowing an insurance company to divide the claims-paying resources of an insurer after a policyholder has acquired its policy,” Corcoran added, “an insurance regulator subjects policyholders to enhanced risk regarding the ability of that insurer to repay its claims — a risk that no policyholder could have anticipated under New York law.”

The case, referred to as the Article 78 proceeding, was filed in June 2009 by 17 financial institutions holding residential mortgage-backed securities insured by MBIA. It is set to go to trial Jan. 19, 2011.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.