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More private mortgage insurers eyeing credit risk transfer

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Expect more private mortgage insurers to follow Arch Capital’s lead and offload some of their exposure to potential defaults by homeowners to capital markets investors.

Last year, Arch sold $368.1 million of bonds whose performance is linked to that of a pool of mortgages that the company insures. Should losses on the mortgages reach a predetermined level, investors will forfeit some of their principal.

The deal is an alternative form of reinsurance. It was modeled on transactions that Fannie Mae and Freddie Mac have used since 2013 to offload the risk of losses on mortgages that they insure.

Participants at the Structured Finance Industry Conference in Las Vegas say that another private mortgage insurer is currently marketing a deal, and several others may follow suit.

"It’s an interesting way to think about capital," said Adam Budnick, a managing director at AIG, which invests in credit risk transfer securities issued by both the GSEs and private mortgage insurers.

On the one hand, “you can think of it as shedding risk,” Budnick said. But transferring credit risk through the capital markets can also be seen as a way of replacing capital, because the less risk on a company's books, the less capital it needs to set aside. “If the cost is attractive, that can make a lot of sense,” he said.

Mary Stone, a managing director at Bank of America Merrill Lynch, thinks that future deals could be linked to the performance of jumbo loans, and not just conforming loans, as Arch's deal was.

Depending on execution, it may also make sense for banks, as well as mortgage insurers, to do deals transferring the credit risk on nonagency and jumbo conforming loans, Stone said.

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RMBS Credit risk transfers PMI Arch Mortgage Insurance Co. AIG