Radian Guaranty Sheds Risk in Capital Market Deal
Radian Guaranty has completed its third and largest Smart Home transaction, allowing the company distribute mortgage credit risk on $6.27 billion of nonprime credit quality loans to the capital markets.
Under the Smart Home program, Radian mitigated the risk associated with credit losses on the portfolio of nonprime loans by ceding a portion of the pool to an un-affiliated reinsurance company that in turn sold $172.9 million of credit-linked notes to investors in the capital markets. Radian executives say that selling risk to capital market investors in exchange for part of the premium stream attracts a wider spectrum of investors to the risk management market than using a traditional reinsurance strategy would. MGIC, Milwaukee, has also employed the capital markets to disperse credit risk.
The notes in this latest transaction are backed by the pool of $6.27 billion of Radian-insured non-prime mortgage loans, the largest Smart Home transaction yet for Radian. The performance of these notes is linked to the credit and prepayment performance of the underlying pool of mortgages.
Dimitri Papatheoharis, vice president for capital markets at Radian Guaranty, said that 28 investors from the U.S. and Europe have purchased credit-linked notes from Smart Home. Most are institutional investors experienced in the mortgage securities market, he said.
"The force behind conceiving that idea was to manage our nonprime mortgage insurance exposure," he said.
Mark Casale, an executive vice president for mortgage insurance at Radian Guaranty, said the Smart Home strategy shows Radian's continued innovation in risk management.
"Obtaining reinsurance from Smart Home requires that we give up some premium, but in return we receive coverage that is strong and stable," he said in a news release.
Suzanne Hammett, chief risk officer and executive vice president at Radian Group, said the Home Smart program demonstrates a way companies can effectively approach risk management in the B&C credit market.
"While the nonprime segment of the mortgage insurance market is profitable, it demands a disciplined approach to risk management."
Radian has engaged in two previous Home Smart transactions, ceding a portion of risk on an $882 million portfolio in August of 2004 and on a $1.68 billion pool in February of 2005.
SNAPSHOT: Smart Home Transaction
Loan Pool $6.27 Billion
Notes Sold $172.9 Million
# of Investors 28
Source: Radian Guaranty
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