MBIA (MBI) profit fell dramatically in the third quarter as troubled mortgages tied to Countrywide (now Bank of America (BAC)) resulted in a sharp drop in the perceived value of mortgage-bond transactions insured by the bond insurer, according to the company's earnings report.
MBIA posted a profit of $7 million, or 4 cents a share, in the third quarter Wednesday. That's down significantly from a third-quarter profit of $444 million, or $2.26 a share, in the third quarter of 2011.
This steep profit loss is the direct result of the firm having to report unrealized changes in the fair value of insured derivatives, specifically vehicles tied to commercial real estate and insured RMBS deals.
MBIA says the market's reduced perception of insured bonds associated with MBIA Insurance Corp. is one of the reasons for changes in the estimated value of the insured derivatives to change.
"The company is required to adjust the values of its derivative liabilities for the market's perception of its non-performance risk," said MBIA. "The decrease in the value of the derivative liabilities attributable to the change in non-performance risk is reflected as an unrealized gain on the income statement."
Mortgage transactions posed a significant threat to value, including what MBIA calls "ineligible mortgages" from Countrywide.
"The path forward for our structured finance subsidiary, MBIA Corp., requires that we collect our put-back recoverables, principally from Countrywide and Bank of America, who continue to renege on their contractual obligation to repurchase billions of dollars in ineligible mortgages," said Chuck Chaplin, president and CEO of MBIA.
BofA lawyers claim insurer MBIA knew what it was getting into when it agreed to insure mortgage bonds containing subprime loans originated by Countrywide.
"Their default has put substantial pressure on MBIA Corp.'s liquidity position. We remain confident that we will ultimately resolve our litigation with Bank of America and collect the put-back recoverables, which will improve MBIA Corp.’s stability," Chaplin added.
For the period, MBIA increased its projection of future payments on second-lien RMBS exposures by $60 million due to faster prepayment speeds. Overall, third-quarter economic losses on all insured deals — including CDOs, CMBS, second-lien RMBS and other transactions — hit $252 million in the third quarter.