Illinois Housing Agency Drops FGIC as Bond Insurer

CHICAGO (Reuters) - The Illinois Housing Development Authority on Friday voted to drop bond insurer Financial Guaranty Insurance Co. and instead use Financial Security Assurance due to the potential credit crunch situation facing FGIC, a spokeswoman said.

"Since Financial Guaranty Insurance Corp was perceived in the financial market as having higher risk, which will cause the bonds to be priced higher; the authority acted proactively to switch bond insurer from FGIC to Financial Security Assurance to allow our bonds to be sold at the lowest interest rates," said spokeswoman Man Yee Lee.

She added that the authority uses bond insurance to obtain the lowest cost for its bonds.

FGIC, which is partly owned by Blackstone Group (BX.N: Quote, Profile, Research, Stock Buzz), has come under scrutiny by Moody's Investors Service and Fitch Ratings due to its exposure to the sinking subprime mortgage market. Moody's on Nov. 8 said the triple-A-rated bond insurer was "highly likely" to fall below the rating agency's triple-A capital adequacy benchmark in a stress scenario due to the company's exposure to collateralized debt obligations.

Fitch Ratings issued a similar warning that the insurer could face a rating cut.

On the other hand, FSA, which is part of Dexia (DEXI.BR: Quote, Profile, Research, Stock Buzz), was cited by Moody's as one of a few insurers with minimal exposure to asset-backed securities and collateralized-debt obligations and was "highly unlikely" to fall below the benchmark.

An Ohio official last week expressed confidence in FSA, which insured parts of the state's $210 million revenue bond issue.

(Reporting by Karen Pierog)