Tuesday, November 10, 2009

Counterparty Risk: The Mortgage Insurers

by Calculated Risk on 11/10/2009 01:35:00 PM

From the Ambac 10-Q:

While management believes that Ambac will have sufficient liquidity to satisfy its needs through the second quarter of 2011, no guarantee can be given that it will be able to pay all of its operating expenses and debt service obligations thereafter, including maturing principal in the amount of $143,000 in August 2011. In addition, it is possible its liquidity may run out prior to the second quarter of 2011. Ambac is developing strategies to address its liquidity needs; such strategies may include a negotiated restructuring of its debt through a prepackaged bankruptcy proceeding. No assurances can be given that Ambac will be successful in executing any or all of its strategies. If Ambac is unable to execute these strategies, it will consider seeking bankruptcy protection without agreement concerning a plan of reorganization with major creditor groups.
emphasis added
Apparently the Wisconsin Commissioner of Insurance will rule on Ambac’s statutory capital by November 16th. (ht JA)

And from Freddie Mac's 10-Q:
We have institutional credit risk relating to the potential insolvency or non-performance of mortgage insurers that insure single-family mortgages we purchase or guarantee. As a guarantor, we remain responsible for the payment of principal and interest if a mortgage insurer fails to meet its obligations to reimburse us for claims. If any of our mortgage insurers that provides credit enhancement fails to fulfill its obligation, we could experience increased credit-related costs and a possible reduction in the fair values associated with our PCs or Structured Securities.
...
Based upon currently available information, we expect that all of our mortgage insurance counterparties will continue to pay all claims as due in the normal course for the near term except for claims obligations of Triad that are partially deferred after June 1, 2009, under order of Triad’s state regulator. We believe that several of our mortgage insurance counterparties are at risk of falling out of compliance with regulatory capital requirements, which may result in regulatory actions that could threaten our ability to receive future claims payments, and negatively impact our access to mortgage insurance for high LTV loans. Further, one or more of these mortgage insurers, over the remainder of 2009 or in the first half of 2010, could lack sufficient capital to pay claims and face suspension under Freddie Mac’s eligibility requirements for mortgage insurers.
More from MarketWatch: MBIA loses $728 million as slowdown hits bond insurer

The zombie watch continues ...