The insurers' shares also soared Wednesday on talk of a possible capital infusion or other plan to bolster their financial status. MBIA Inc. (NYSE: MBI) surged $4.08 to $16.61, Ambac Financial Group, Inc. (NYSE: ABK) rocketed 71% higher, or up $5.73 to $13.70, and The PMI Group, Inc. (NYSE: PMI) rose 94 cents to $8.31. MGIC Investment Corp. (NYSE: MTG) rose 5 cents to $16.10.

Hopeful sign

Economist David H. Wang said the talks, if they result in some form of sustained, capital infusion for the major insurers, would be a hopeful sign for the markets and for the financial system.

"It would be a very positive development. The mortgage insurers are one support in the financial foundation that cannot be allowed to fail, in my view. The money is critical to sound, functioning financial markets," Wang told BloggingStocks Wednesday.

Economists and analysts say the new capital would not only preserve the credit ratings of top bond insurers' such as MBI and Ambac, but would also bolster investor confidence in this key component of the mortgage finance process. Mortgage insurers guarantee about $2 trillion in mortgage assets.

Wang has argued that a failure by MBIA or Ambac would mean several banks would not receive insurance payments for mortgages that go into default, substantially reducing the asset values of those banks, possibly resulting in a failure by one or more banks.

Critical capital

Wang argued that the issue was paramount enough to warrant a special capital meeting coordinated by the U.S. Treasury and/or the U.S. Federal Reserve, but if New York state insurance regulator meetings have the same result -- capital infusion for the key insurers -- the positive results will be the same.

"It matters not which level of government has primary meeting responsibility, so long as a viable plan is put in place, the markets and the U.S. economy will have removed one key stumbling block to sustainable economic growth," Wang said. "And given the large amount of bad economic news we've had lately, that will be a welcomed development."

Subprime and non-subprime mortgage defaults by borrowers over the past sixth months has eroded investor confidence in the insurers, causing their shares to plunge, and prompting some in Wall Street circles to raise concerns about the impact an insurer's insolvency would have on both banks and the financial system.

Ambac, after a write down of more than $5 billion of its credit derivatives portfolio, became the first bond insurer to lose a AAA rating when Fitch Ratings downgraded it to AA.