The PMI Group created PMI Guaranty because it saw the need to serve the whole credit spectrum. PMI Guaranty was formed to respond to a specific niche in the market - the second loss position.

Traditionally, the PMI Group had been providing mortgage insurance, which covers the first loss position. Then, in 2003, the firm was the lead investor in a group of companies that acquired FGIC, which provides enhancement to the remote loss position

This put PMI in a good position to deal with the environment post 2003. This was the point where the mortgage market started to change and several market factors coincided to generate greater demand among investors for various mortgage related products.

It was also at this point when Fannie Mae and Freddie Mac, which were dominating the secondary market until then, started to back off. This opened up the chance for private players - including investment banks - which became more adept at slicing the cash flow generated by mortgages to create different kinds of investment products. These array of mortgage-related offerings included various forms of loss protection at different points along the credit spectrum, not limited to the first-loss position covered by traditional mortgage insurance but remote loss protection (which PMI provides through our investment in FGIC) and protection at the mezzanine level, which PMI Guaranty now offers.

Fall into the gap

"We found a gap in the middle between the first loss piece and the remote loss position," Winston Wohr, managing director and chief operating officer at PMI Guaranty, said. "We wanted to provide enhancement to mezzanine level risk layers and eventually to cover a much broader range of financial products. PMI Guaranty is trying to look forward a year to three years from now when credit enhancement needs will be much more varied across multiple asset classes. We want to have as much flexibility as possible as a provider of credit enhancement going forward."

Wohr added that he believes the flexibility this type of company can provide PMI's customers from a credit enhancement and risk management perspective is extremely valuable. "Capital markets solutions are continuing to evolve and we have to be responsive to them," Wohr said.

PMI Guaranty, Wohr added, currently has the right regulatory structure to provide enhancement that comes in the form of mezzanine loss protection, NIMS, and credit default swaps (CDS) transactions.

Customized solutions

Art Slepian, chief executive officer at PMI Guaranty, said that being able to provide mezzanine level credit enhancement would enable them to provide more customized solutions to their customers. For instance, PMI can now include coverage on NIMS securities in the menu of credit enhancement solutions that it offers to its customers.

Slepian explained that various market participants, including banks and Wall Street conduits, use a variety of credit enhancement products in the mortgage space that could add value to their transactions, ranging from the first loss through the mezzanine and remote loss levels.

Specifically, for the mezzanine space, many banks, for instance, which are anticipating Basel II-related changes coming through the pike, are "exploring many avenues of protection in the market - they have sizeable retention or co-participation on this," Slepian said. "It's a more holistic approach to their risk management needs with many of these types of financial institutions taking a longer-term view of credit and regulatory capital needs as their business continues to evolve."

He added that one of the interesting things about PMI Guaranty is that it has the ability to directly provide insurance to issuers and investors and provide reinsurance to other financial guarantors and insurers that operate in this space.

New Jersey-based PMI Group is a licensed surety company with an initial statutory capital position of $200 million. It is rated AA+' by Standard & Poor's and Fitch Ratings and Aa3' by Moody's Investors Service.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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