Radian’s next offering of credit risk transfer notes reinsures a slightly smaller portion of risk on the reference pool of residential mortgages.
Eagle Re 2019-1 will issue a total of $562 million of rated notes linked to the performance of a pool of $42.35 billion of mortgages on which Radian provides $10.71 billion of insurance, according to Morningstar Credit Ratings. This time, however, investors required Radian to hold on to the first 2.5% of losses it covers on the pool; by comparison, the insurer’s previous deal, Eagle Re 2018-1, had a lower “attachment” point of 2.25%.
Both deals have the same “detachment point” of 7.75%; Radian retains all of the risk of losses above this level.
Radian provides insurance for homeowners who want to quality for a mortgage insured by Fannie Mae or Freddie Mac but cannot afford to make a 20% down payment. So if a borrower puts down 5%, Radian reimburses the government-sponsored enterprises for any losses between 5% and 20%, for example.
The most subordinate notes to be issued by Eagle Re 2019-1, the $267.6 million Class B-2 notes, representing the first-loss position, are unrated and will be retained by Radian. The $42.8 million of Class B-2 notes, which will begin to sustain losses after 2.5% of the principal value in the reference pool insured by Radian is wiped out, are rated B+; the $235.5 million Class M-2, which have an attachment point of 2.9%, are rated BB-; the $176.6 million Class M1-B notes with an attachment point of 5.1% are rated BBB-; and the $107 million Class M1-A notes with an attachment point of 6.75% are rated BBB+. Radian is also retaining $9.8 million of Coverage Level A notes, which represent exposure to losses above 7.75%.
As in the prior deal, Radian is retain no less than 50% in the Coverage Level B-2 and at least 5% of the offered notes in the Coverage Level B-2
The mortgages being reinsured in the latest deal are less seasoned, five months on a weighed average basis, that those reinsured with Radian's prior deal, which had a weighted average seasoning of 11 months. The weighted average FICO score of the borrowers is slightly lower, at 739 vs. 741, and the borrowers also have slightly less equity in their homes; the weighted average loan-to-value ratio is 92.6%, up from 92.4%.
Notably, the weighted average debt-to-income ratio for the mortgages being reinsured in the latest deal is higher, at 38.5 vs. 36.4 in the prior deal.
Among the risks to the deal, according to Morningstar, is the fact that less than 1% of the loans being reinsured were sampled by a third-party due diligence provider. The presale report does not indicate how much less than 1%, however. The presale report for the prior deal indicated that just 0.26% were sampled. At the time, that was a smaller portion than some of its peers.
In the case of Eagle Re 2019-1, the due diligence provider review determined that two loan within the sample did not meet Radian’s eligibility requirements. 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 the GSEs’ acquisition guidelines and origination processes produce a homogeneous reference pool that may not merit a population-wide review, Morningstar feels that thee small sample size elevated the default risk.
