Written by Allison Bisbey for Asset Securitization Report Online on February 27, 2019.
As a growing proportion of private mortgage insurers tap the capital markets for reinsurance, the implications of credit risk transfer become increasingly valuable. In addition to protecting mortgage insurers from downturns in the housing market, CRT data also reveals market sentiment around credit risk. Industry experts believe this information could eventually be used to adjust private mortgage insurance premiums.
The world’s largest private mortgage insurer, Arch Capital Group, comes to market every six months, providing notes on performance links to developing insurance policies. ACG’s premium pricing team uses notes to understand investors perception of credit risk biannually. Jim Bennison, executive vice president for capital markets, commented on the informative power of CRT at SFIG’s annual ABS in Las Vegas. “To date, there have not been any actual adjustments on the front end, credit risk transfer execution has been good.” Bennison told a conference audience. “But at some point, that will likely change as we go through a normal housing cycle.”
Though PMI has historically operated with a cross-subsidized premium, maintaining flat rates regardless of credit quality, the housing crisis revealed the industry’s underpricing of risk. ACG moved to risk-based pricing shortly after the 2008 crash.
The capital market transactions of Fannie Mae and Freddie Mac are comparably informative, revealing market sentiment around guarantee fees charged to all lenders. The market for GSE credit risk, now boasting over 200 investors, garners substantial federal attention. “. . . (we) do monitor CRT execution,” said Mike Reynolds, the vice president for CRT at Freddie Mac, “At a minimum, it’s very informative to the FHFA.”
Read More via Asset Securitization Report Online