Analysts at Standard & Poor’s Ratings Services say mortgage and bond insurers could be facing losses 20 percent greater than the rating agency had calculated less than a month ago.

After plugging new assumptions about losses in subprime loans made from 2005 through 2007 into a model that’s used to test insurers’ ability to sustain losses, Standard & Poor’s found the companies remain adequately capitalized. But losses will be greater than expected in a Dec. 19 report, with the increase in projected losses ranging from 2 percent to 36 percent among the companies evaluated.

What’s changed are the rating agency’s expectations of losses on subprime loans. In their report last month, Standard & Poor’s analysts assumed losses of 5.75 percent on subprime loans made in 2005, 15.5 percent for those made in 2006, and 17 percent in 2007.

Now, due to “growing economic consensus that U.S. home-price declines will be larger than previously forecasted” and that the housing slump “may last far longer than previously expected,” Standard & Poor’s projects losses to hit 8.5 percent on the 2005 “vintage” of subprime loans, 18.8 percent on 2006 loans, and 17.4 percent for loans made in 2007.

Standard & Poor’s is not taking action to downgrade any of the insurers’ ratings, but said the new analysis justified an earlier decision to put several companies on notice that their ratings could be lowered. Companies whose financial strength ratings are lowered could have more difficulty borrowing money and attracting investors, and might lose their ability to guarantee more mortgages and bonds

The rating agency currently has a negative outlook on the AAA financial strength ratings of Ambac Assurance Corp., MBIA Insurance Corp., CIFG Guaranty, and XL Capital Assurance Inc. Standard & Poor’s has placed on Credit Watch negative the AAA financial strength rating of Financial Guaranty Insurance Co.

“We do not view the extent of the deterioration as significant in the context of each company’s capital position and the comprehensiveness and degree of completion of projected capitalization strengthening efforts that are underway” at companies facing ratings downgrades, Standard & Poor’s said.

Insurers whose AAA financial strength ratings are “stable,” or not being considered for imminent downgrades, are Assured Guaranty Corp. and Financial Security Assurance Inc. Radian Asset Assurance Inc. has an AA financial strength rating that is stable.

The increased loss projections “did not materially impair the adjusted capital cushions” of companies with “stable” ratings outlooks, the report said.

Moody’s Investors Service said Wednesday it was placing Ambac’s Aaa financial strength rating on review for a possible downgrade, citing the company’s expectations of a $5.4 billion fourth-quarter loss on its credit derivative portfolio. Moody’s said today it was also reviewing MBIA Insurance Corp.’s Aaa financial strength rating for possible downgrade.

The reports have helped send shares of Ambac Financial Group Inc., MGIC Investment Corp., MBIA Inc., PMI Group Inc. and Radian Group Inc. down sharply Thursday.

Ambac officials said today that they have decided not to go forward with a plan to raise $1 billion in capital after Moody’s announced it was considering downgrading the firm’s Aaa financial strength rating.

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Send tips or a Letter to the Editor to matt@inman.com, or call (510) 658-9252, ext. 150.

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