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Radian latest insurer to tap capital markets for reinsurance

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Add Radian Guaranty to the list of private mortgage insurers tapping the capital markets for reinsurance.

The company’s first transaction, Eagle Re 2018-1, transfers a portion of the credit risk on approximately $36.3 billion of mortgages, 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 Radian itself provides just $9.1 billion of coverage on the reference pool. Of this, Eagle Re will reinsure approximately $410 million through the issuance of three tranches of rated notes, Classes M-1, M-2, and B-1.

Radian follows in the footsteps of at least four other private mortgage insurers: Arch Capital, NMI, Essent Guaranty and MGIC 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.

Among the strengths of the deal, according to Morningstar, is the fact that the majority of loans conform to the underwriting guidelines of Fannie Mae or Freddie Mac. The borrowers have a weighted average FICO score, at the time of origination, of 741, which is the lowest of the seven transactions rated by Morningstar this year. The weighted average original debt-to-income ratio of 36.5 is also among the highest.

However, the loans benefit from more seasoning than all but two prior deals, at 11 months. As a result, the weighted-average loan-to-value ratio, as calculated by Morningstar, has fallen to 88.1% from 92.2 originally. This creates a buffer against a possible future depreciation in home prices.

In at least one respect, Radian’s deal is slightly riskier than that of its peers. The company samples a smaller fraction of loans than some of its peers for quality control — typically less than 0.4%. By comparison, NMI samples less than 0.5%, while Essent typically samples less than 7%, according to presale reports for these transactions. Only Radian samples less, 0.26%.

And none of the sampled mortgage loans, regardless of the due diligence grades assigned, will be removed from the pool. Nor was the sampling 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.”

Eagle 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, and a BB- 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, Radian will retain at least 5% of the B 2-H notes. It is also retaining the A-H notes.

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