One of the questions posed by the recent financial crisis is whether bond insurers will ever cover mortgage securities risks outside of the municipal sector again.

As it stands, it takes a lot to imagine when anyone might want to go back into that business, said Stanislas Rouyer, senior vice president on Moody's Investors Service specialty insurance team, who recently co-authored a report on financial guarantors.

"You would have to convince management that the product that almost killed the industry is one that you should embrace again," he told National Mortgage News.

Today, as Rouyer and his co-author put it in their report, "Most guarantors are uninterested or unable to insure additional mortgage-related risks."

Never mind the ones they are already supposed to be covering, in some cases.

Risk holders have had to settle for a fraction of the obligation in the case of one bond insurer and claims paying has been interrupted at times, Rouyer and co-author Helen Remeza, vice president and senior analyst on Moody's specialty insurance team, said.

"What we've seen is that in some cases the regulator asked the bond insurer to stop paying claims until they have proposed and implemented a plan to improve their capital profile," Remeza told National Mortgage News.

Why? Well, consider this. Two bond insurers, Syncora and FGIC, currently "may face insolvency or receivership," Moody's noted. Bond insurers Ambac, MBIA and CIFG "are in a suspended state of operations." Only Assured Guaranty actively writes new business today, that's only in the context of the municipal market bond market, of course.

If there are any bright spots in all this one may be that while some risk holders have had to settle for partially paid claims, that seems to be the worst case scenario to date. While this and loan buybacks are not good news for risk holders, they are among strategies that have allowed the two worst-off market participants to avoid a total inability to pay claims so far. When it comes to FGIC and Syncora, "Their statutory surplus had been statistically negative for several quarters," Remeza said.

But when asked if either would actually become insolvent, Rouyer said, "I think that's what the regulators are trying to avoid."

All this added up to an outlook that is still negative for financial guarantors, according to Moody's.

"The losses are still developing. There's a question as to whether the worst is behind us or not," Rouyer said. Like many experts, Moody's believes the jury's still out in terms of when the housing downturn will end and mortgage losses improve. Although there is some hope the situation is getting a little clearer.

This year "will better define the future of this industry" as more workouts progress, risk commutation agreements are entered and litigation moves forward, Remeza said. Among other things, there has been some activity in terms of buying back wrapped RMBS that may help clarify the ultimate mortgage-related loss in the bond insurance sector.

The Moody's report suggest there may come a day when the market turns around and new entrants who lack the legacy of problem loan exposures may enter the financial guaranty business to compete, starting in the municipal market. Eventually competition may drive a move to other sectors, the report suggested. One could imagine that this might some day include MBS. But you may not want to hold your breath, especially given the lack of a private-label MBS market.

The Moody's report also looked at the possibility of a mortgage covered bond market in the U.S. and whether it has implications for bond insurers. But if there are any covered bond implications for these guarantors they are probably in terms of public sector loans and not mortgage bonds, according to the report.

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