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MGIC is next insurer tapping capital markets for reinsurance

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Mortgage Guaranty Insurance Corp. joins a growing list of private mortgage insurers tapping the capital markets for reinsurance.

The company’s inaugural transaction, Home Re 2018-1, transfers a portion of the credit risk on a $54.55 billion pool of full amortizing, fixed- and variable rate, first-lien loans that have never been reported as in default, according to Morningstar Credit Ratings.

Private mortgage insurance is typically obtained by borrowers who make a down payment of less than 20% on their homes, so MGIC itself provides just $7.5 billion of coverage on the reference pool. Of this, Home Re will reinsure approximately $318.6 million through the issuance of three tranches of rated notes, Classes M-1, M-2, and B-1.

MGIC follows in the footsteps of at least three other private mortgage insurers: Arch Capital, NMI and Essent Guaranty have all completed similar deals over the past year or so. These deals allow them to meet capital requirements imposed by Fannie Mae and Freddie Mac. Since these requirements are being revised in a way that is expected to create big swings in carriers' asset reserves, carriers may opt to tap the capital markets more often.

In at least one respect, reference pool of loans for Home Re is less risky than some of the prior credit risk transfer deals rated by Morningstar: the weighted average seasoning is 14 months, which exceeds that of any comparable with the exception of the second deal Arch Capital completed this year, Bellemeade 2018-2.

The additional seasoning means that these homes have experience over a year of price appreciation, on average. As a result, the current weighted average loan-to-value ratio, as calculated by Morningstar, has fallen to 89% from 93.1% at the time of origination. That's slightly lower than the weighted average DTI of any outstanding deal rated by Morningstar except Bellemeade 2018-2.

The weighted average original FICO of 746 is as high or higher than that of all the other deals Morningstar has rated with the exception of Bellemeade 2018-2.

And the weighted average debt-to-income ratio of 35.8% falls within the range of 34% and 37.2% for Morningstar-rated deals.

However, MGIC samples a smaller fraction of loans than some of its peers for quality control — typically less than 0.26%. By comparison, MNI samples less than 0.5%, while Essent typically samples less than 7%, according to presale reports for these transactions.

And none of the sampled mortgage loans, regardless of the due diligence grades assigned, will be removed from the pool. Nor was the sampling was not expanded to identify other loans with similar defects. “This might lead to inclusion of loans that would otherwise be excluded with a full population quality control,” the presale report states. While Fannie and Freddie’s acquisition guidelines and origination processes produce a homogeneous reference pool that may not merit a population-wide review, the small sample size “elevated the default risk under the Morningstar rating stresses.”

Home Re will issue five tranches of notes. The Class B2H tranche of notes, which represents the first loss position, is unrated. Morningstar expects to assign a B+ to both the Class B-1 notes, which benefit from 2.25% credit support, as well as to the Class M-2 notes, which benefit from 2.5% credit support. The Class M-1 notes, which will take a hit after losses on the reference pool reach 4.6%, is provisionally rated BBB-. The senior tranche of A-H notes is unrated.

In order to align its interest with those of investors, MGIC will retain at least 5% of the B 2-H notes. It is also retaining the A-H notes.

The BBB- rating on the Class M-1 notes is on par with Morningstar's rating of the comparable tranche of Essent's Radnor Re, but one notch below the BBB on the Class M-1 tranche of NMI's Oaktown Re or three of Arch's four rated transactions to date. (Bellemeade 2018-2, which reinsured highly seasoned loans, obtained an AAA from Morningstar, though it was only rated A+ by Fitch.)

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