MBIA, Ambac capital level risk rising, Moody's says

NEW YORK Tue May 13, 2008 4:09pm EDT

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NEW YORK May 13 (Reuters) - Moody's Investors Service on Tuesday said losses for residential mortgage debt are worse than it expected and may hurt the capitalization levels of bond insurers MBIA Inc (MBI.N) and Ambac Financial Group Inc. ABK.N

In a report on U.S. subprime second-lien residential mortgage debt, Moody's said bond insurers have "significant exposure" to second-lien residential mortgage debt.

The rating agency has cut 819 subprime second-lien residential mortgage securities this year, affecting $29 billion of debt. More than $17 billion of the securities remain on review for more potential cuts.

"Moody's loss expectations for this asset class are higher than previously anticipated, owing to worse-than-expected performance trends," the rating agency said in a statement. "This could have material implications for the estimated capital adequacy of financial guarantors most exposed to this risk."

MBIA, the world's largest bond insurer, posted a quarterly loss of $2.4 billion on Monday as it took charges on billions of dollars of exposure to repackaged subprime mortgage debt. For details, see [ID:nN12329970].

Moody's noted that in recent announcements of first-quarter earnings, MBIA and Ambac both reported material credit impairment losses on asset-backed securities that were structured into collateral debt obligations (CDO) and loss reserve charges on direct residential mortgage exposures, including second-lien securitizations.

Losses at both companies' residential mortgage debt and CDO portfolios "are now meaningfully higher than the rating agency's prior expected-case loss estimates, elevating existing concerns about capitalization levels relative to the Aaa benchmark," Moody's said in a statement.

Based on losses to date, the rating agency has increased its loss projections on loan pools backing subprime second-lien residential mortgages.

Bond insurers to a lesser extent have exposure to ABS CDOs, where second-lien securities typically make up less than 5 percent of collateral.

Moody's now expects 2005 vintage subprime second-lien pools to lose 17 percent on average, 2006 vintage pools to lose 42 percent, and 2007 pools to lose 45 percent on average.

MBIA's shares fell 5.4 percent, or 53 cents, to $9.32 on the New York Stock Exchange. Ambac shares fell 7.6 percent, or 33 cents, to $4.00. (Reporting by Walden Siew; Editing by Jonathan Oatis)

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