The recently appointed head of capital markets at PMI Europe urges caution in the European asset-backed sector, as the industry begins slowly to return to form. Richard Sullivan, a former Dresdner Kleinwort investment banker who moved into the newly created position at PMI Europe less than three months ago, believes that lenders will build stronger businesses if they allow third parties, such as specialist insurance companies, to help mitigate the risk associated with new business growth, especially at the riskier mezzanine level.

"The liquidity problem started with the manifestation of risk," said Sullivan. "Over the past few years, the model for structured finance had become more volume driven and less risk driven." In fact, other market observers have echoed Sullivan's comments that the European ABS market underwent changes as far back as two years ago that may have directly contributed to the current credit crises. Banks are also currently continuing to show reluctance to return to the primary market, as the general sentiment is that no single financial institution wants to be the first one back to market. However, in six to 12 months, the market could begin to gain momentum as more competition is generated by a growing base of investors.

"But in two to three years, memories may fade and the market could become volume driven again," Sullivan added. Indeed, many European Union policy makers have expressed their desire to see more regulations in the securities market, to avoid another credit crunch within the decade. And it is likely that some form of legislation will come into effect in 2008 as finance ministers in France, Italy, Portugal, Spain and the United Kingdom have approached the subject.

Sullivan said regulators as well as investors will be asking two basic questions about credit market fundamentals. The first will be whether the market lacks transparency to the point that it is difficult to determine where the risks lie. The second, and more important one, is, "Will we know, in the future, where the risk is?" Sullivan said.

Sullivan said that the role of specialist credit insurance companies will increase as the market returns to fundamentals. For instance, PMI amasses data on how mortgages behave under a variety of circumstances and uses that data to develop underwriting guidelines.

Sullivan is eager to source mortgage credit business from his base in London, for he believes that the European capital markets will be looking for new ways to hedge and diversify risk away from the traditional mezzanine investor community.

The way mortgage insurance is sold in the U.S. and Australia differs dramatically from the European model. In the U.S., mortgage insurance is sold directly to the borrower, who may be able to apply for tax deductibility if his income is less than $100,000. Similarly in Australia, home buyer mortgage insurance is sold to the homebuyer, but in all cases, the insurance cover protects the lender should the mortgage customer default on his loan.

In the U.K. and most of Continental Europe, products are marketed directly to mortgage lenders rather than to consumers, and the products benefit residential lending activities in a number of ways, chiefly by regulatory capital relief and by risk transfer - by removing a significant portion of the insured loan's default risk from the lender's book.

Basel II is expected to create an environment in which risks and regulatory capital would be better aligned, making high loan-to-value lending more expensive. Mortgage insurance products are important tools for lenders to minimize the capital assigned to such high-risk forms of lending.

Sullivan, who has nearly 20 years of experience in the capital markets industry, joined Dresdner Kleinwort in 2002 before moving to PMI Europe. At Dresdner, he was responsible for developing the bank's principal and leveraged finance activities as well as its ABCP conduit business. Before Dresdner, Sullivan was director, deputy head of securitization and head of ABS Europe for Societe General from 2000 to 2002.

"Richard brings an enviable reputation, the necessary expertise and significant industry experience to the role," said Tony Porter, executive vice president and managing director of international mortgage insurance at PMI. "Our clients are seeking more and more innovative solutions to their risk-management and funding needs, and Richard will refine and accelerate our ability to meet those needs, facilitating the growth of our capital markets insurance business across Europe."

Avarina Miller, a senior vice president at Demica, the capital solutions consultancy, worked with Sullivan in the early 1990s, during the nascent stages of the U.K. mortgage securitization industry, at National Home Loans, now known as Paragon. Miller said she still keeps in touch with Sullivan. "Richard is a smart guy and fun to work with," Miller said, "and I'm sure his new colleagues at PMI Europe will find the same."

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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