PMI Helps Aareal to Transfer Credit Risk
Byline: Piers Townsend
A residential mortgage-backed securities (RMBS) issue for Aareal Bank has opened new doors for German mortgage originators by laying off risk that is set to tie up more capital under new state rules.The deal is the latest in a series of securitisations sponsored by KfW, the German state development agency. It allowed Aareal, the real estate entity of DePfa Group created when DePfa spun off its property arm, to transfer the credit risk of a pool of mortgages to the public markets. The transaction was underwritten by Deutsche Bank.
The deal's structure addressed forthcoming changes to German regulations governing so-called "first loss pieces", or slices of risk that are exposed to the first losses on the mortgage pool.
BAFin, the German banking regulator, argues that mortgage originators are not really laying off all of their risk if they keep the first loss piece. Therefore, it plans to introduce punitive capital allocation requirements for subordinated first loss tranches.
BAFin is expected to follow other European bank regulators and allocate 100% risk weighting - or more - for first loss risk retention.
This could make securitisation more expensive and less attractive for originators unless they can sell the first loss exposure to a third party. Aareal solved the problem by striking a deal with PMI Europe, part of the San Francisco-based PMI Group, which took the first loss piece. PMI provides mortgage credit enhancement to European lending institutions and financial intermediaries.
Bankers said that using PMI was a useful way of disposing of assets that carry high risk weightings, allowing originators to take their risk weightings down to a more manageable 40% to 50%.
Tony Porter, executive managing director of PMI Europe, says: "We don't think there is another mortgage insurer in the marketplace that can provide the flexibility necessary for a transaction of this type." At least one other bank has been in touch with PMI to sound out a similar deal.
The issue was synthetic, in which the issuer transfers the credit risk of assets to third parties while retaining ownership of the assets themselves - in this case, a portfolio of mortgage loans. …