Home Equity: Insured Conti Subprime Issue Wins a High Rating

that Contimortgage Corp. issued using a structure that could set the pattern for troubled subprime issuers. The rating agency said last week that though Conti's portfolio is above average in credit risk, it merited the blue ribbon rating because of an unusual insurance policy from MBIA Insurance Corp. Moody's senior analyst, Diane Westerback, said that MBIA would back virtually all of the $734 million portfolio. "The noteholders would get their money even if Conti ran into trouble, because MBIA would be on the hook," Ms. Westerback said. Also giving the rating agency confidence to rate the securities Aaa is an arrangement to transfer servicing of the loans to Countrywide Home Loans within a month of their closing. "The shifting of servicers is something you might see with financially stressed servicers in the future," Ms. Westerback said. "One of the fears that investors have with stressed companies is that if they run into trouble they might neglect the servicing." If Conti were to file for bankruptcy this month - which is considered unlikely, Ms. Westerback said - loan transfers to Countrywide could be delayed and bankruptcy courts could even overrule the agreement. Conti is among the home equity and subprime mortgage specialists that ran into trouble a year ago when liquidity dried up in the secondary market, limiting their ability to fund themselves. Conti appeared destined for bankruptcy as its losses mounted, a proposal to sell to GMAC-RFC fell through, and $420 million of unsecured bank loans came due last month. But it got a last-minute reprieve when the due date on the bank loans was extended for six months. Ms. Westerback said Conti's next portfolio securitization may prove more difficult. "Most of this portfolio was originated when it was still thought that GMAC-RFC was going to purchase Conti," she said, and that suggests something positive about the soundness of the mortgages. "At this point though, it's typical that they (Conti) would empty out their books at every securitization." MBIA Insurance is protected from losses on bad loans through a combination of excess spread, overcollateralization, and a reserve fund. Ms. Westerback said the deal is overcollateralized by 4.85%. Additionally, the coupon on the mortgages is higher than the payments on the notes, so there is extra cash taken in each month. "You could take losses of up to 4.85% of the portfolio before it impacted the notes," Ms. Westerback said. "The reserve fund takes the cash overflow at a certain point and lets the other loan groups access the money as well."