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Moody’s warns on bond-insurer ratings again

This time, second-lien mortgage securities may test ratings, agency says

By Alistair Barr, MarketWatch

Last Update: 4:16 PM ET May 13, 2008

SAN FRANCISCO (MarketWatch) — Poor performance of second-lien residential
mortgage-backed securities could put pressure on the credit ratings of bond
insurers, Moody’s Investors Service said Tuesday.

Bond insurers have significant exposure to second-lien residential
mortgage-backed securities, or RBMS, mainly through guaranties on the securities
and through exposure to collateralized debt obligations partly backed by such
securities, the rating agency said.

“Moody’s loss expectations for this asset class are higher than previously
anticipated, owing to worse-than-expected performance,” it elaborated. “This
could have material implications for the estimated capital adequacy of financial
guarantors most exposed to this risk.”

Shares of MBIA Inc. (MBI) fell 6.3% to $9.23 during afternoon trading, while
Ambac Financial Group (ABK) dropped 7.6% to $4.

MBIA reported a $2.4 billion first-quarter net loss Monday. A big chunk of that
was driven by impairments on collaterized debt obligations, known as CDOs, as
well as by loss reserves related to second-lien mortgage securities.

Ambac reported a $1.66 billion first-quarter net loss in April. The bond insurer
set aside a provision of $1.05 billion to cover losses on guarantees of mortgage
securities mainly backed by second-lien and Alt-A home loans.

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