Residential Capital’s bankruptcy filing on May 14 is a credit negative for two major bond insurers, Moody’s Investors Service said.
Residential Capital is one of the largest mortgage lenders in the United States.
MBIA, rated B2 with a negative outlook, and Assured Guaranty, rated A3 and on review for a downgrade, would both be affected, Moody’s said.
In the last decade, U.S. bond insurers, in addition to insuring municipal bonds, also insured mortgage-backed securities. When the real estate bubble popped and prices collapsed, the bond insurers were called on to cover losses in the securities.
The losses drained financial resources from the insurers, pushing down their ratings. Most ceased writing new bond insurance.
Many of the insurers have sought compensation from the banks and other mortgage originators, claiming they put poor-quality mortgages into the securities. The insurers have argued that the banks’ inclusion of these poor-quality mortgages breached the representations and warranties made to the insurers when they chose to insure them.
They have called for the banks to reimburse them for their losses or to repurchase, or put back, the securities.
The ResCap bankruptcy is a “credit negative for financial guarantors, as it could reduce recovery on guarantors’ put-back claims against the mortgage lender,” wrote Moody’s associate analyst Myra Shankin. Put-back claims could be reduced as part of the Chapter 11 process.
MBIA appears to be more exposed to ResCap than Assured Guaranty, Shankin wrote in a recent report.
In its first-quarter earnings statement, MBIA said it is entitled to recover a total of $4.8 billion from all parties, including ResCap. However, it recorded $3.2 billion as a recoverable, gross of income taxes. None of this money has been recovered yet. MBIA has recovered a small sum in representation and warranty breaches from financial firms, but this sum is not included in the $3.2 billion figure.
MBIA’s accountant has approved listing the $3.2 billion figure as an asset because the parties contractually owe MBIA the money, a source at the insurer said.
MBIA added that in case of a ResCap bankruptcy it “may have to substantially reduce the value of [ResCap] recoveries, depending on MBIA Corp.’s assessment of its likely recovery in the bankruptcy proceeding.”
While Shankin did not specify the insurers’ expected receivables from ResCap, she wrote that MBIA insured $2.4 billion of ResCap residential mortgage-backed securities as of March 31 and that Assured Guaranty has less than $1 billion of exposure to ResCap.
“ResCap is one of Assured Guaranty’s smaller rep and warranty providers and as of March 31, 2012, assured was carrying a rep and warranty asset of only $10.7 million related to ResCap,” said Robert Tucker, managing director at Assured Guaranty.
Shankin also noted that “servicing…is key to protecting financial guarantors from having to pay out additional claims under their insurance policies.”
“ResCap announced that Nationstar Mortgage is the proposed stalking-horse bidder for the sale of ResCap’s servicing,” she said.
A Nationstar acquisition would be a positive for loan servicing, according to Shankin.