(ADDS comments from Standard & Poor's Wednesday conference call, starting in first paragraph; adds comment on capital adequacy from MGIC.)

By Lavonne Kuykendall

Of DOW JONES NEWSWIRES

CHICAGO -(Dow Jones)- Some mortgage insurers that got involved with risky loan products during the housing boom and then saw losses skyrocket no longer deserve AA financial strength ratings, the biggest rating agency said Wednesday.

Among the loan products that got insurers and lenders into trouble are so- called low documentation loans and loans that gave borrowers the option of paying less than they owed on principal and interest each month.

Such loans "really changed the nature of the sector and we are seeing risks in the market that we haven't seen before," said Standard & Poor's analyst Rodney Clark during a Wednesday conference call S&P held to explain downgrades it issued late Tuesday to four mortgage insurers.

"It has led to an evolution in how we see risk management," Clark said. "All of those are contributing factors as to why we felt a year or more ago this was an AA industry and now we are starting to moderate that view."

Despite capital adequacy in some cases that exceeded AAA standards, S&P cut mortgage insurer financial strength ratings to A status late Tuesday on concern over the industry's risk management expertise.

Both the mortgage insurance units of MGIC Investment Corp. (NYSE:MTG) (MTG) and Radian Group Inc. (NYSE:RDN) (RDN) were cut to A from AA-. PMI Group Inc.'s (NYSE:PMI) mortgage insurance business (PMI) was cut to A+ from AA, and Old Republic International Corp.'s (NYSE:ORI) ( ORI) was cut to AA- from AA. Of the four, only Radian remains on negative watch, while the other three were taken off negative watch and placed on negative outlook.

The housing downturn of the last several months is unprecedented in its scope and will lead to an overall 20% depreciation in housing values, according to S&P estimates. Claims on mortgage insurance policies are expected to reach a in 2007, but to remain above long-term averages through 2009.

The downgrades put three mortgage insurers below the minimum AA- rating they need to meet mortgage lender standards, but S&P said further downgrades were unlikely unless the economy deteriorates more than expected.

In that case, ratings could fall further, most likely by one or two notches. A negative watch on a rating means a roughly one in three chance over the next two years of further downgrades.

At the same time, upgrades in the near future are just as unlikely.

"The path back to AA- is a long one," said analyst Rodney Clark, during S&P's conference call.