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Ambac Responds to Article Related to Its Second Lien RMBS Exposure


Ambac Responds to Article Related to Its Second Lien RMBS Exposure

NEW YORK.- Ambac Financial Group, Inc. (NYSE:ABK) (Ambac) today responded to a Credit Sights article published on May 21, 2008 that calls into question the current level of Ambac’s loss reserves on its second lien RMBS exposure. In the article Credit Sights opines that Ambac will see continued deterioration within its second lien portfolio and resultant losses could be massive given the nature of second lien risk. The article refers to the Moody’s Special Report on Subprime Second Lien RMBS dated May 12, 2008. In that report Moody’s presented its estimates of minimum, average and maximum cumulative loss assumptions for the asset class for vintage years 2005, 2006 and 2007. The Credit Sights article offers little independent analysis, fails to consider the basic structural arrangements of individual transactions (one cannot simply multiply a cumulative loss assumption by net par outstanding to determine ultimate loss) and does not attempt to reconcile to Moody’s previously reported RMBS losses for Ambac.

In response to the article, Ambac has posted a presentation on its second lien exposures on its web site at and points out the following:

* In estimating its reserves, Ambac analyzes its closed end second lien (“CES”) and home equity line of credit (HELOC”) exposures on a transaction by transaction basis using the most recent actual performance data and projecting future performance using “roll rate” analysis.
* Ambac’s assumptions in these asset classes are conservative and include the following (see above referenced presentation for further details):
o No burnout from peak levels of roll rate (transition rate from 30-day delinquent to 60-day delinquent and so on) for 18 months;
o Conditional Prepayment Rate (“CPR”) of 6% versus industry-wide assumptions of approximately 10%;
o 100% severity (loss given default).
* Both the CES and HELOC asset classes demonstrate clear segmentation within our portfolios based on vintages and originators, particularly earlier versus later vintages and bank versus non-bank originators. Ambac discloses all of its poorly performing transactions in the above referenced presentation. The remaining portfolio is performing within expectations. To assume the worst performance on the entire portfolio lacks an appropriate level of professional analytics and is, therefore, irresponsible.
* Ambac has not factored in any potential recovery related to its aggressive remediation plan regarding these portfolios despite the fact that we have begun the process of putting back loans that we believe do not fit the various criteria represented by the originators.


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