The End Of Municipal Bond Insurance?
The bond insurance industry’s decision to insure the residential mortgage market has come back to haunt them and has not only caused them huge losses but could also cost them their most profitable source of income. The decision by Moody’s Investor Service this week to rate municipal bonds by the same standards as their corporate counterparts could signal the end of the municipal bond insurance era.
The change threatens to accelerate a drop in demand for bond insurance, which began when losses related to subprime mortgage debt resulted in MBIA, Ambac and at least three other companies losing their top credit ratings this year. Only 24.7 percent of municipal debt offerings sold this year were insured, down from 49.1 percent in the same period last year, according to a Lehman Brothers Holdings Inc. report.
Growing pressure on ratings agencies from public officials across the country, heavily influenced this decision. When the auction rate bond market collapsed due to investors’ mistrust of insurers, borrowing cost skyrocketed for many communities through no fault of their own.
The municipal bond market was the golden goose of the bond insurance industry and for years made up the bulk of it’s profits. With low default rates, the income from this market was pretty much risk free, unlike mortgage backed securities and other collaterized debt obligations.
This was the reason Warren Buffet decided to enter the market back in February and offered to reinsure $800 billion in municipal bonds from troubled insurers. However, if most municipalities get upgraded to a AAA rating as expected, there will be little need for his new subsidiary despite the sterling reputation he brings to the table.
