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| Tony Porter |
PMI Mortgage Insurance Co. plans to start offering protection on first-loss tranches of residential mortgage-backed securitizations from Spain, Italy and The Netherlands. Tony Porter, Dublin-based executive v.p. and managing director of international mortgage insurance, said PMI will expand its offering from collateral originated in Germany to those countries by year-end. In a typical transaction, PMI would enter into a credit-default swap with a bank counterparty that would then sell protection to the lender on its first-loss piece. First-loss sales are rare because there is a lack of transparency on potential losses at that part of the capital structure in securitizations.
PMI Europe is the only company to structure first-loss residential mortgage-backed transactions on the Continent and so far has assumed first-loss credit risk only on German RMBS. PMI used DZ Bank as a swap counterparty in Germany and is looking to find new counterparties for the expanding business line. Regulatory capital requirements preclude double-A rated PMI from unilateral guarantees with lenders.
Demand from lenders across Europe is picking up for PMI's guarantees because regulators have been increasing the amount of capital banks must hold against first-loss credit risk. Given the position of the risk on the capital structure, issuers are rarely able to structure sales transferring it. "It's not that mortgage lenders don't want to get the first-loss piece off their balance-sheets; it's that it hasn't been an option until now," said Porter.
Market conditions also play a role in demand from banks to reduce their exposure to first-loss classes, Porter noted. "Property values have already slipped in The Netherlands." The prospect of higher interest rates and defaults also make it appealing for lenders to insure the first-loss piece.
Germany was a logical place for PMI Europe to launch its business in 2001 because German mortgage lenders had a particularly urgent need for regulatory capital relief, were already leaders in synthetic securitizations and were comfortable with credit default swaps.
