WASHINGTON–A congressman who has scheduled a hearing on the challenges faced by bond insurers said their current difficulties point to a “real need” for stronger oversight of the industry.

The comment by Rep. Paul Kanjorski, D-Pa., chairman of the Capital Markets Subcommittee of the House Financial Services Committee, came as he released letters he sought from regulators asking how the industry is regulated and what are its problems.

He announced that a hearing on bond insurers’ issues would be held Feb. 14.

“Because the problems created by unrest in the bond insurance markets go to the heart of our economy and the very vitality of municipal finance, we must examine these matters as soon as possible in a hearing before the Capital Markets Subcommittee,” Rep. Kanjorski said.

The primary concern of the House Financial Services Committee is that the difficulties of the credit insurance industry will impact the sale of municipal bonds used to raise funds for state and local capital development projects, further slowing the economy.

Rating firms have threatened to revoke the “triple-A” ratings of bond insurers, and without a sound underwriter behind municipal issues, they become less attractive to buyers and unacceptable to risk-averse pension and investment funds.

On Tuesday Sandler O’Neill, which analyzes bank stocks, said in a note to investors that a “handful” of U.S. tax-exempt bond auctions over the past several weeks have failed because of the difficulty in getting credit insurance.

In its note, Sandler O’Neill analysts said Piper Jaffray acted as dealer in four failed auctions last week. “We believe this is meaningful because it is really the first time tax-exempt bond auctions have failed since 1991 and also highlights a potential spillover impact of capital adequacy concerns in the monoline bond industry,” the analysts said.

Rep. Kanjorski, in advance of his hearing, sought input from federal and state financial regulators. Among the letters in response was one from Wisconsin Insurance Commissioner Sean Dilweg, who said the problem bond insurers are having is not one of solvency but of credibility in the marketplace created by their decision to stray from their core business of insuring municipal bonds into more exotic lines of products.

Mr. Dilweg’s state is the domicile for Ambac Assurance, which on Jan. 18 saw Fitch Ratings drop its financial strength rating to “double-A” from “triple-A.”

Ambac is currently negotiating with various banks for a cash infusion in the wake of a huge plunge in its stock price following the Fitch action and other rating firms placing it on watch.

Ambac’s problems stem from concerns it may not have the resources to pony up cash to pay for financial guaranties it provided to structured investment vehicles backed by subprime mortgages on which borrowers are defaulting.

“I currently view the situation with Ambac as a franchise value issue rather than a solvency issue,” Commissioner Dilweg said in responding to Rep. Kanjorski.

“The most recent statutory financial statements of Ambac and all the information we have from the company show a financially strong company that has sufficient ability to meet its obligations to its policyholders, on both an incurred and cash-flow basis,” he said. He said Ambac “meets or exceeds all of the financial solvency requirements” established by the state.

Commissioner Dilweg said the municipal bond guaranty business of Ambac “currently is, and all signs point to a continued stable, profitable line of business.”

The problems, he said, stems from the securitized investment business guaranty business that Ambac and most other bond insurers began writing in the 1990s, and “which has more volatility.”

“I think the combination of the uncertainty in the financial guaranty and credit markets with the increased potential claims on some of these securitized investments has resulted in the rating agency’s actions,” Commissioner Dilweg said.

“They are calling into question not so much the solvency of these companies but rather the ongoing franchise value of these insurers,” he explained.

Besides Commissioner Dilweg, others who responded to Rep. Kanjorski’s request for information about the plight of bond insurers, how the industry is regulated and the potential impact on the financial markets included the Federal Reserve Board, the Securities and Exchange Commission, the Office of the Comptroller of the Currency, and state regulators from Maryland and New York.

Ralph Tyler, Maryland insurance commissioner, is the regulator of ACA, a credit insurer whose downgrade to “triple-C” has resulted in its being unable to write new business.

Commissioner Tyler said ACA’s current problems stemmed from the decision of it and other financial guaranty insurers in the early 2000s to expand their products to include guarantees on structured credit insurance products, for example, through insured credit default swaps.

“The financial assets underlying the insured credit default swaps principally include corporate credits, asset-backed securities and mortgage-backed securities,” Commissioner Tyler said.

“This business, particularly that portion of which the underlying assets consist of subprime mortgage-backed securities, is the source of the current issues faced by certain financial guaranty insurers,” he said.

“The uncertainty concerning the ultimate performance of subprime mortgage-backed securities, and the resultant potential for future losses, is central to recent rating agency actions,” Commissioner Tyler said.