The bailout of insurance giant AIG International Group Inc. also makes taxpayers majority owners of a company that insures mortgages guaranteed by Fannie Mae and Freddie Mac -- those entities were placed under government conservatorship on Sept. 7.

The Federal Reserve announced late Tuesday that it would lend up to $85 billion to AIG in exchange for an 80 percent ownership interest in the company. The loan will help AIG sell certain subsidiaries "in an orderly manner, with the least possible disruption to the overall economy," Fed officials said.

AIG's subsidiaries include United Guaranty Residential Insurance Co., the fifth-largest private mortgage insurer in the United States with a 12 percent share of the $357 billion in new private mortgage insurance written in 2007, according to Fitch Ratings.

Although United Guaranty is still considered adequately capitalized to write new mortgage insurance policies for Fannie Mae and Freddie Mac, its expected that it and other mortgage insurers will continue to see mounting losses on loans insured in 2007.

In a July report, analysts at Fitch Ratings said that while mortgage insurers tightened underwriting standards in the first quarter of 2008, last year "will likely prove to be one of the worst underwriting years in the modern history of the U.S. mortgage industry" (see Inman News story).

Fitch analysts said losses will make it difficult for mortgage insurers to grow their portfolios, opening the door for startup companies to meet the needs of Fannie Mae and Freddie Mac, which require private mortgage insurance when borrowers put less than 20 percent down.

Fannie and Freddie traditionally required mortgage insurers to be rated "AA-" or better by at least two rating agencies, and several insurers have seen their ratings slip to that level or below (see story).

Fannie and Freddie stopped doing new business with one mortgage insurer, Triad Guaranty Insurance Corp., after the company failed to raise the capital needed to maintain its rating, and several other mortgage insurers have been required to submit remediation plans following rating downgrades.

Fitch Ratings said today it has changed the status of its "AA-" insurer financial strength rating of United Guaranty from "negative" to "evolving" in light of the government's loan to parent company AIG.

"Fitch views this transaction as a favorable development that alleviates significant near-term liquidity concerns," the rating agency said.

In a statement, AIG said proceeds of certain businesses would allow the company to repay the government's loan in full and enable them "to continue as substantial participants in their respective markets."

But it remains to be seen whether AIG can spin off United Guaranty, leaving open the possibility that taxpayers will not only be providing a backstop for Fannie and Freddie, but for a major mortgage insurer of both companies.

In its most recent quarterly report to investors, AIG said it racked up a $5.4 billion second-quarter net loss and a $13.2 billion loss for the first six months of the year.

The New York Times reported that some AIG business segments remain profitable, and that the company's biggest problems are in a London-based financial products unit that sold credit-default swaps that insured securities backed by mortgages. AIG provides credit-default swaps through subsidiaries AIG Financial Products Corp. and AIG Trading Group Inc. and their subsidiaries.

But mortgage insurer United Guaranty has also been a money loser during the housing downturn. The 60-day delinquency rate on the company's $31.8 billion mortgage risk in force rose to 4.9 percent at the end of June, compared with 2.5 percent a year previously, AIG said in its last quarterly report to investors.

AIG said it also has exposure to losses from the housing downturn through mortgage-lending subsidiary American General Finance Inc., and through its insurance and financial services subsidiaries' heavy investments in mortgage-backed securities (MBS) and collateralized debt obligations (CDOs).