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Second Mortgages Sting MBIA

This article is more than 10 years old.

The housing crisis is not over for bond insurer MBIA. The company is still losing money on dodgy mortgage-backed securities that it insured at the height of the U.S. housing bubble.

MBIA posted a sharply increased third-quarter loss as it increased its loan-loss reserves on second-lien mortgages, loans that don't get paid in a foreclosure until the primary loans are satisfied.

The results did not sit well with investors. The Armonk, N.Y.-based firm fell 20.0%, or $2.10, to $8.37, during morning trading. Its smaller rival Ambac Financial Group fared worse, losing 25.6%, or 87 cents, to $2.53. The insurers' shares are now off 74.8% and 89.7%, respectively, from their year-ago levels.

The bond insurance industry has been hemorrhaging losses as the credit crunch worsens and the financial products the companies insured have plunged in value.

MBIA lost $806.5 million, or $3.48 per share, during the third quarter, far worse than its deficit of $36.6 million, or 30 cents per share, during the similar quarter last year. It has lost an aggregate $1.5 billion during the first nine months of 2008.

The company added $961.0 million to its loss reserves on $16.7 billion of second lien residential mortgage-backed securities it backs. This was because the insurer saw delinquencies on this type of debt increase during the period after two quarters of relatively flat performance. The other half of MBIA’s $33.7 billion residential mortgage-related portfolio involves first liens, of which $9.5 billion are prime, $3.5 billion are less-than-perfect-credit Alt-A, and $4.0 billion is subprime. MBIA also backs $42.7 billion in commercial mortgage backed investments which have seen a have seen a slow increase in delinquencies. MBIA's total insured portfolio stood at $778.0 billion at the end of the period.

MBIA also recorded a $155.7 million pretax loss on efforts to delever its asset liability management company. It also took set aside $66.0 million pretax loss on projected future claims on its the collateralized debt obligations it insures. The second figure had already been included in earlier write-downs.

On the upside, MBIA's premiums business surged thanks to a large reinsurance contract with rival Financial Guaranty Insurance. (See "MBIA Picks Up FGIC's Slack.") That deal alone accounted for $812.0 million of the $928.0 million in premiums written during the period. Last year, MBIA had $229.0 million during the period. Downgrades by credit agencies have made it expensive for FGIC, which is owned by Blackstone Group , to borrow money.

MBIA has taken legal action against two loan sellers and servicers, and filed a claim against a third, regarding certain defaulting bundles of second-lien mortgages. The insurer is alleging that certain past loans do not meet eligibility requirements for its protection and that it should therefore not be liable for losses. Ambac, which was also forced to fortify its reserves against bad residential mortgage loans, said it expects to pull in at least $500.0 million in legal damages related to underwriting shenanigans such as this.

In February, billionaire investor Warren Buffett offered to reinsure $800.0 billion worth of municipal bonds guaranteed by MBIA, Ambac and FGIC. All three rejected the proposal. (See "Buffett Bailing Out Bond Insurers.")

Municipal bonds are the traditional business of the insurers, but as the housing market boomed in the early years of this decade they moved into more exotic, mortgage-related securities, with disastrous results.