Moody's View Darkens on Bond Insurers

Moody's Investors Service said that it may complete its review of monoline bond insurers by mid- to late February -- a move that may result in downgrades, given the ratings agency's increasingly negative view on the mortgage market.

In a conference call Friday morning, Moody's explained that its view of the entire sector is becoming more negative. It said it would be employing more stringent assumptions in assessing the outlook and capital adequacy of firms such as troubled guarantor heavyweights Ambac Financial(ABK Quote) and MBIA(MBI Quote). Downgrades to monolines would be devastating, as their pristine credit is critical to their core business of insuring some $2.4 billion to $2.6 billion in debt.

The health and viability of the financial guarantors, which insure debt issued from municipalities as well as newfangled securities structured by investment banks known as collateralized debt obligations, has been deeply tested by the stresses in the mortgage market. The fear is that delinquencies in some of the securities these entities provide a backstop for -- which have so far been relatively few -- may begin to ratchet up significantly in the near term.

Moody's said its review will not just take into account how much capital the bond insurers have obtained to shore up their balance sheets, but also the viability of the companies' future business model.

TheStreet.com also has noted that capital shortfalls may not be the only concern for guarantors. Bond insurer customers have been reluctant to do business with these firms and the possibility of them being downgraded also may mean that a number of insurers may be vying for the double-A or single-A cut of the monoline business -- a much smaller slice of the bond insurer pie.

Moody's on Thursday increased its loss assumptions for 2006 first-lien mortgages to 21% from 19%. Fitch Ratings on Friday followed that up by releasing a report noting that it also has increased loss expectations on 2006 subprime residential mortgage-backed securities (RMBS) to 21%, and on RMBS originated during first half of 2007 to 26%. The Fitch ratings action impacts about $139 billion of RMBS.

Fitch's rating move follows the downgrade and negative ratings action by Standard & Poor's of some 8,000 RMBS bonds and CDOs on Wednesday. S&P also forecasts a whopping $265 billion in losses on those securities.

Meanwhile, efforts to bail out monolines appear to be still underway. CNBC reported Friday that a consortium of eight banks including Citigroup(C Quote), Wachovia Bank(WB Quote), UBS(UBS Quote), Barclays Capital(BCS Quote) and Royal Bank of Scotland(RBS Quote) are working in conjunction with the New York Insurance Superintendent Eric Dinallo to hammer out a bond insurer bailout plan.