Arch Capital’s second offering of credit risk transfer notes of the year is linked to the performance of recently underwritten residential mortgages that have never been delinquent.
That’s in contrast to its previous offering, completed last month, which featured heavy exposure (35.5%) to loans that have been modified by Fannie Mae or Freddie Mac.
Bellemeade Re 2019-2 references a $35.58 billion pool of loans; Arch’s affiliates, Arch Mortgage Insurance and United Guaranty Residential Insurance, provide $8.87 billion of insurance on the pool. The transaction will transfer $621 million of this risk through the issuance of five tranches of rated notes. If losses on the pool reach a predetermined level, noteholders can lose their principal.
The class B-2 notes, which are unrated, represent the first loss and will be wiped out when losses reach 2.5%; Arch is retaining at least 50% of this tranche in order to align its interest with those of investors.
The class B-1 notes, which are rated BB- by Morningstar Credit Ratings, reinsure losses beginning at 2.5% of the reference pool, the class M-2 notes are also rated BB- but have a higher attachment point of 2.75%, the Class M-1C notes are rated BBB- and have an attachment point of 4.6%, the class M-1B notes are rated A- and have an attachment point of 6.5% and the class M-1A notes have an attachment point of 8% and are rated A.
Arch is retaining the senior-most class of notes, coverage level A, which sustain all losses over 9.5%.
Arch was not able to offload as much of the risk in its prior deal; it retained the entire first-loss position in Bellemeade Re 2019-1 and the lowest attachment point of the rated tranches of notes was 3.5%.
The loans being reinsured in the latest offering are considerably less seasoned that those reinsured by the previous transaction, four months, on a weighted average basis, compared with 126 months for Bellemeade Re 2019-1. As a result the borrowers have not been able to benefit from as much housing price appreciation. So the current loan-to-value ratio for Bellemeade Re 2019-2 is considerably higher, 92.1% vs. 76.9%, for Bellemeade Re 2019-1.
The loans in the reference pool for the latest deal are larger, with an average balance of $247,367 vs $150,579; the borrowers also have higher FICO scores of 742 vs. 707 for the prior deal.