Assured Guaranty Re-Examining Countrywide Loans It Insured
Dow Jones

CHICAGO -(Dow Jones)- As the U.S. housing downturn continues, Assured Guaranty Ltd. (AGO) is re-examining lending documents for some of the $2.1 billion in guarantees it wrote for home equity lines of credit issued by Countrywide Financial Corp. (CFC) to see if the loans meet Countrywide's stated terms.

If they don't, Assured Guaranty will ask Countrywide to make good on the loans either by taking them back or replacing them with better loans.

The examination revolves around "representations and warranties" in the contracts themselves, Bob Mills, Assured Guaranty's chief financial officer, said Thursday. "We are evaluating that situation and documentation."

Problems that could invalidate a loan would include whether the housing values, credit scores and terms were as promised, Mills said. He said that some of the current mortgage problem nationwide was driven by poor underwriting decisions and a proliferation of riskier loans, such as low- and no- documentation loans, low teaser rates and relaxed credit scoring.

A spokeswoman said that most of the re-examination was of the most recent loans, as terms on older loans would be harder to evaluate.

Overall, "the expected solution is the way it was designed, the repayment of loans covering subordination by excess spread and rapid amortization triggers that work to our benefit," rather than widespread loan cancellation, Mills said. Mills was speaking at a JPMorgan insurance conference in New York Thursday.

With the exception of those home equity loans, Assured Guaranty has come through the subprime crash with little damage, owing in large part to the company's decision not to get involved with so-called asset-backed collateralized debt obligations, or CDOs, Mills said.

Those are the securities that have resulted in huge losses for some of its rivals. One of the positive results of Assured Guaranty's strong position is that its market share in the municipal bond business approached 50% in March, as issuers faced a shrinking field of top-rated bond insurers.

The $2.1 billion in home equity loan-backed securities Assured Guaranty insured for Countrywide has run into trouble as defaults on the loans rose above expectations in the last few quarters.

Default rates on loans written in 2007 are rapidly approaching so-called rapid amortization triggers, which would channel payments on the loans to the insurer. Defaults on its 2005 Countrywide securities will also hit the rapid amortization trigger "in the not very distant future," said Mills.

Losses on the securities could become material if Countrywide is unable to fulfill some of its obligations, including its obligation to fund future draws on the lines of credit, Mills said.

That doesn't mean that Assured Guaranty is looking for a way to get out of guaranteeing repayment on the Countrywide loans, Mills said.

Bank of America Corp. (BAC) has announced plans to acquire Countrywide for $4 billion, in a deal that awaits regulatory approval.

Two other bond insurers are involved in disputes over a broader attempt to cancel guarantees they wrote on subprime mortgages.

FGIC Corp., which is 42% owned by mortgage insurer PMI Group Inc. (PMI), has accused IKB Deutsche Industriebank (IKB.XE) of Dusseldorf, Germany, of fraud in a lawsuit seeking FGIC's release from $1.85 billion in guarantees it sold to IKB. The German bank's finances began to unravel shortly after it signed the deal, and the bank has since restated some earnings.

Bond insurer Security Capital Assurance Ltd. (SCA) canceled seven credit default swap contracts it signed with Merrill Lynch & Co. (MER) after it said Merrill violated terms of the agreements by making side deals with rival insurer MBIA Inc. (MBI), giving both insurers the same control rights on the same securities. Merrill filed a lawsuit earlier this month demanding that SCA fulfill the terms of its deal.

During the same JPMorgan conference, an Ambac Financial Group Inc. (ABK) executive replied, "No comment," when he was asked if that bond insurer might try to cancel any of its contracts. Ambac, like FGIC, has exposure to IKB Deutsche Industriebank.

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; lavonne.kuykendall@

  (END) Dow Jones Newswires
  03-27-08 1903ET
  Copyright (c) 2008 Dow Jones & Company, Inc.
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