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

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: Quote, Profile, Research, Stock Buzz) and Ambac Financial Group Inc. (ABK.N: Quote, Profile, Research, Stock Buzz)

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.