NEW YORK (Bloomberg) — Bermuda-based Syncora Holdings Ltd.'s bond insurance unit has been downgraded by Moody's.

Syncora Guarantee Inc.'s financial strength rating was cut two levels to Caa1 from B2 and left under review with "direction uncertain," the New York-based ratings agency said on Friday.

Separately, New York-based Financial Guaranty Insurance Co.'s B1 rating was placed under review for a downgrade, Moody's said.

"Higher expected mortgage default rates and severity were reflected in upward revisions to Moody's lifetime loss estimates for certain recent vintage residential mortgage-backed securities announced in September," the ratings company said.

Syncora and FGIC both stopped writing new business this year after losses on securities backed by sub-prime mortgages led to the loss of their AAA credit ratings.

Syncora averted insolvency after its former parent company XL Capital Ltd. eliminated virtually all of its own reinsurance exposure to Syncora when it made a $1.78 billion payment to the company.

Syncora's rating direction was labelled "uncertain" because it may renegotiate contracts on some guarantees of collateralised debt obligations backed by sub-prime mortgages, resulting in an improved financial position for remaining policyholders, Moody's said. CDOs parcel fixed-income assets such as bonds or loans and slice them into new securities of varying risk.

In August, FGIC ceded most of its municipal book of business to MBIA Inc. and agreed to tear up a guarantee contract on a poorly performing CDO. The July transactions prevented FGIC, owned by Blackstone Group LP and PMI Group Inc., from being considered insolvent by regulators.

"These events have had a positive impact on estimates of FGIC's capital adequacy but are likely to be more than offset by the impact of increased loss assumptions for FGIC's mortgage related risks," Moody's analyst Arlene Isaacs-Lowe said in a statement.