PMI Europe has expanded into Italy, debuting its continental presence via its new Milan office. Earlier in March, triple-A monoline bond insurer MBIA also opened an office in Milan, anticipating similar potential for growth in the structured finance market (see ASR 3/15).

PMI Europe, a mortgage insurer and credit enhancement provider, hopes to add a valuable dimension to one of the fastest growing mortgage markets in Europe.

"Italy is one of the fastest growing markets in Europe but at the same time one of the most immature markets in the sense that it lags Europe significantly in lending against its GDP," said Tony Porter, managing director of PMI Europe. "Rates have fallen since [Italy] joined the European Union, terms have lengthened, home prices have risen, and lending has become more competitive, all of which has created borrower demand for - and lender interest in providing - low downpayment mortgages. Our product fundamentally enables this type of lending."

Under Italian law, lenders face 100% capital risk-weighting when writing loans with 80% loan-to-value (LTV) without a guarantee in place. Under a structure protected by mortgage insurance, these same high LTVs would potentially face only half of that capital risk weighting. Porter added that, by far, the potential for the fastest rate of growth in the Italian mortgage markets comes from high LTV lending - and since announcing their move, the Milan branch has received calls daily, he said.

According to Moody's Investors Service, Italian mortgage-backed deals (which includes 100% residential-backed pools and mixed residential/commercial pools) accounted for 10.4 billion (US$12.6 billion) of issuance in 2003 compared with the 6.3 billion (US$7.6 billion) it represented in 2002. In 2003, the first master trust structure was initiated through Banca Fin-Eco. Moody's added that there has been an increase in small local co-op banks participating in the market as well.

Italian banks' large portfolios should continue to provide ample opportunity for RMBS deals, and Moody's expects more of the same activity experienced in 2003. "The impact on this asset class of the widely expected increase in interest rates remains to be seen," reported analysts at Moody's. "Banks' lending activity may be negatively affected, while delinquency ratios in existing portfolios could increase, eventually leading to a higher level of default."

If the cycle starts to shift the other way, mortgage insurance may be an option for lenders to look at different possibilities for distributing risk outside of the institution. Mortgage lenders purchase mortgage insurance that covers exposure to high LTVs in order to provide protection against the risks associated with this type of lending. Mortgage insurance could also find a role for the developing Italian covered bond market.

At the moment, structurers are waiting for a legislative initiative, as seen in other countries, to get the market off to a start. If such a development follows the German model, Italian pools would be limited to pools with a conservative 60% LTV - mortgage insurance would allow banks to consider collateral at a higher margin. "Italian mortgage securitization has moved well beyond non-performing loan issues," Porter went on to say. "This vibrant MBS market will benefit by our coverage in that mortgage insurance is expressly credited in any subsequent securitization, reducing credit enhancement levels."

Giuliano Giovannetti will be in charge of managing the new Italian branch of PMI Europe. The branch application is still pending, but is expected to be approved quickly, said Porter. How the mortgage insurance ultimately impacts risk-weighting and securitization won't be clear until the insurance begins to penetrate the market, but things are looking positive, said PMI's Porter. So far, the conversations the insurer has had with the Bank of Italy have proceeded well both on the Italian regulatory side and on the impending Basle II regulatory side.

"We've met PMI an other mortgage insurance companies interested in entering the Italian market, and they have explained to us how a mortgage insurance company would give an impulse to the market by widening the origination of high LTV loans (above 80%), by allowing for the spread of equity release and by making mortgage loan financing more accessible to certain individuals," said one source at Moody's. "Their intention is to contribute to the reduction of increased risks connected to the possible enlargement of the mortgage market.

"All in all," the source added, "we think that the entrance of a new market participant, who understands the market and is in a position to price risks, would certainly be a positive element in all markets, including the Italian one."

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