More Downgrades to Monoline Bond Insurers Show Worst of Mortgage Crisis May Yet Lie Ahead

Standard & Poor’s Ratings Services decided this week to reignite mortgage market worries surrounding monoline bond insurers, downgrading two AAA behemoths in MBIA Inc. (MBI) and Ambac Financial Corp. (ABK). But fresh assumptions regarding just how bad the mortgage mess really is led the agency to knock the core ratings of CIFG Guaranty and Security Capital Assurance Ltd. (SCA) further down the ratings ladder on Friday — and it warned it may soon do the same to Financial Guaranty Insurance Company, as well. In other words, if you thought the mortgage mess was nearing an end, it’s probably time to think again. Take SCA, for example; S&P downgraded both of the firm’s monolines, XL Capital Assurance and XL Financial Assurance, to a BBB- rating on Friday — that’s a junk rating, for the record — from a previous rating at the A- level. The agency said that its assessment of the firms’ collective 2005-2007 vintage RMBS exposure had increased beyond what it estimated less than four months ago; that’s a pretty short window to see best-laid assumptions head further south. As a result, SCA’s monoline franchises are suddenly short $500 million needed just to maintain an investment grade rating, S&P said in its press statement. Like Security Capital, CIFG also saw its ratings cut, but more modestly; S&P cut the insurer’s rating from A+ to A-, it said in a press statement on Friday. “The downgrade reflects our view that CIFG has lagged the industry in par volume in recent years and has generally failed to develop a strong franchise,” the agency said. FGIC was also put on the chopping block Friday, with S&P citing “concern regarding the magnitude of projected RMBS and related CDO losses when compared with claims-paying resources.” The agency put the monoline on credit watch negative and said that the company’s plan to create a good-insurer/bad-insurer, splitting up its municipal and structured finance businesses, would likely disadvantage RMBS and CDO policyholders. Swift losses, new models, fresh downgrades — and more trouble Obviously, for CDO and RMBS holders, further downgrades can mean further losses on affected securities — especially for those whose securities are backed by the two latest AAA-rated franchises to fall, MBIA and Ambac. But the pace at which the agencies are being forced to update their models underscores just how swiftly losses have been mounting in the still-troubled mortgage market. It’s also a source of wear-out and frustration for nearly every bond insurer as well — many of whom have argued that losses will take years to materialize. “Our frustration stems, in part, from the ever-changing criteria for AAA financial strength ratings,” Ambac said in a press statement late Thursday. “Less than three months ago, S&P affirmed our AAA rating and removed Ambac from Credit Watch Negative, citing our successful capital raise and moratorium on new structured finance business production.” It’s worth noting that Fitch Ratings began slashing its ratings on the insurers months ago, and received nothing but grief from insurers; many wondered aloud why Fitch would cut their ratings and other agencies did not. It now appears that, if anything, Fitch’s conservative criteria may have also been the most accurate. Part of the problem is that the underlying collateral — residential home mortgages — are going bad at an increasingly faster rate, as the economy weakens further. Data released this week from the Mortgage Banker’s Association, for example, found foreclosure activity at its highest level since 1979, the first year that foreclosure data is available. Worse yet, as HW was first to report Thursday, the pace of borrower defaults appears to now be shifting in favor of prime borrowers after more than a year of ravaging those with less-than-perfect credit. When this mess first started, more than a few sources told HW that at least four monolines would be put out of business by this mess; one source called it a “long, slow race to a bottom that many firms won’t survive long enough to see.” And while it remains to be seen whether or not any monolines will fail — or at least head into run-off — one thing seems very clear: that mortgage mess we’ve been hearing about for the past year or so isn’t going anywhere. Not yet. Disclosure: The author held no positions in publicly-traded firms mentioned herein when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.