Beleaguered bond insurer MBIA Inc. (MBI) said Wednesday before market open that it lost $806.5 million, or $3.48 per share, during the third quarter, driven primarily by increases to loss reserves on the company's second lien residential mortgage exposures. The quarterly loss compares to a $36.6 million net loss, or $.30/share, in the year ago period; the insurer had posted a profit of $1.7 billion one quarter earlier on an accounting quirk, as HW reported in August. MBIA reversed course -- as we expected -- on their curious Q2 decision not to add to loss reserves, saying it added $961 for its exposure to second liens during the third quarter; we'd singled out second liens as particularly problematic during the second quarter. MBIA said on Wednesday that it faces "high levels of loans that did not meet eligibility criteria for inclusion in the MBIA-insured transactions" as well as "improperly serviced loans," and said it had taken legal action against two seller/servicers over repurchase claim disputes, while filing a repurchase claim with a third company. The near $1 billion loss reserve charge does not account for expected recoveries, the insurer said. One of the firms being sued by MBIA is Bank of America Corp. (BAC) unit Countrywide Financial; MBIA said in early October it has been forced to pay out more than $450 million on $14 billion in guarantees it provided for Countrywide mortgage bonds, alleging the lender fraudulently misrepresented its loan underwriting standards. MBIA said in Wednesday's earnings announcement that its own internal audits have found that as much as 89 percent of delinquencies and defaults affecting deals it insured involved some breach of rep and warranties, implying it will litigate any further claims on RMBS and CDO deals it wrapped a guarantee on -- which is either an indication of how much fraud really existed in recent vintages, or of MBIA's desire for self-preservation. Take your pick. Paid claims continued to skyrocket at the bond insurer, reaching $491.3 million in the third quarter; paid claims were at $304.8 million one quarter ago, and just $107.5 million in the first quarter of this year. Despite the rising losses, MBIA stressed that operating cash flow has remained positive, and was at $130 million in the third quarter. "The insurance company's liquidity resources remain more than adequate to meet anticipated claim payments," the company said in a press statement. "We continually evaluate our housing-related exposures and adjust our loss reserve and impairment estimates whenever deal performance does not track with expectations," said MBIA CEO Jay Brown. "This was the case in the third quarter, and we increased our loss reserves and impairments by approximately $1 billion to reflect our analysis of the impact of weakening economic conditions and a greater number of defaults on improperly originated and serviced mortgage loans." For more information, visit http://www.mbia.com. Write to Paul Jackson at paul.jackson@housingwire.com. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.