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Bond Insurers Rocket on Mortgage Put-Back Report

Thursday, 14 Oct 2010 | 2:27 PM ET

Shares of bond insurers have exploded upward following the dissemination of analyst’s report that they might reap a windfall if banks are forced by buy back mortgages they sold as mortgage-backed securities.

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The so-called “monoline” bond insurers have been requesting that banks buy back pools of mortgages riddled with home loans that violate the representations and warranties banks made when selling mortgage-backed securities. But until today, most analysts and investors thought the amounts involved would be small.

The recent revelations of mortgage documentation problems may be changing that perception.

The report by Manal Mehta of Branch Hill Capital was first issued in August. But it only gained wide circulation yesterday when it was published on the Business Insider website. Today it is being emailed everywhere. The item at Business Insider has over 120,000 pageviews.

Mehta argues that put backs in the magnitude of $2 billion to $3 billion could double the stock price of MBIA and Assured Guarantee. He sees Bank of America as potentially the biggest loser should put-backs take off, in part because of liabilities it took on when it acquired Countrywide and Merrill Lynch.

Until now, the bond insurers have largely been considered losers from the bursting of the housing bubble. They suffered huge losses on their mortgage insurance portfolios as the delinquencies exploded. If the mortgage pools unravel, they will be able to shift those losses back on to the banks that securitized the mortgages.

Not everyone is convinced put-backs will become a major issue for the banks. On yesterday’s quarterly earnings call, JP Morgan Chase chief executive Jamie Dimon said that he did not expect that unraveling mortgage-backed securities would result in huge liabilities for his banks.

None the less, shares of MBIA and Ambac saw double digit gains on Thursday morning. Assured Guaranty rose more than 7%.

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Companies mentioned in this post

Ambac

MBIA

JPMorgan Chase

Bank of America

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