[UPDATE 1: clarifies loan loss reserves, claims] MBIA’s (MBI) Q209 profit of $894.7m ($4.30 per share) is down 47% from its year-ago period profit of $1.7bn. But the Armonk, NY-based monoline hasn’t written any new business during the first half of the year and the quarter’s recorded profits came in large part from decreases to its loan loss reserves MBIA was able to make after absolving itself of an estimated $1.1bn in obligations from defaulted second-lien mortgages it said should have never been securitized to begin with. MBIA conducted a forensic review of more than 23,000 delinquent and defaulted second-lien mortgages contained in 24 insured residential mortgage-backed securities (RMBS) and found they “breached the representations and warranties in the related insured RMBS securitization,” MBIA said in its Q209 report. As a result, MBIA said the sellers and servicers are contractually obligated to repurchase the loans at a cost equal to the outstanding principal plus accrued interest or replace them in the securities with eligible mortgages. The repurchase and/or replacement of the mortgages is under way, and MBIA said the total recovered could be less if servicers are able to successfully challenge the claims in court. Moving forward, MBIA will continue to review mortgages and expects more are subject to repurchase. MBIA paid out $644.6m in claims during Q209, mostly for second-lien mortgages. It also incurred $353.7m in losses on insured second-lien mortgages. The new losses highlight continued troubles for second-lien mortgages. President and chief financial officer Chuck Chaplin said MBIA expects to continue to pay out claims on insured RMBS, but that the company has the resources to cover the payments. Chaplin added the firm has “laid the groundwork” to begin writing new business, specifically municipal bond insurance. Earlier this week, the Federal Deposit Insurance Corporation called on banks to beef up loan-loss reserves for second-lien mortgages. Lenders and regulators aren’t seeing eye-to-eye on the value of second-lien mortgages, now that so many homeowners are underwater on their mortgages. Lawmakers say some junior-lien holders, who believe their loans still hold value, are resisting efforts to modify the loans, slowing down the modification efforts of first-lien lenders. Write to Austin Kilgore.

More: