RALEIGH, N.C. -- GE Capital Mortgage Insurance Corp. is hoping that its flagging "pool" insurance business will be energized by two new developments. , The Raleigh-based unit of General Electric has begun to sell insurance contracts for mortgage pools in advance. Pool insurance, which insures pools of mortgage loans against default, is usually sold on a case-by-case basis.
Separately, the company has seen surging demand for a new type of pool insurance: backing trades of whole loans.
Attempting to Counter Losses
Pool insurance volume has dropped across the industry in the past year as issuers of mortgage-backed securities, its traditional users, turned increasingly to using subordinated debt tranches as an alternative form of credit enhancement.
GE's move to offer pool insurance on a forward commitment basis is an attempt to counter some of the losses the product has suffered to the senior/subordinated structure.
"We're not trying to capture all of the senior/sub business, but we feel we can be a part of the [nonconforming] market," said Tom Lund, senior vice president of negotiated transactions at GE Capital Mortgage.
A negotiated forward commitment for pool insurance allows an issuer of mortgage-backed securities to purchase loans that fall within prearranged guidelines with the knowledge that GE will provide pool insurance at an agreed price. The agreements generally last six months.
Seven Forward Commitments
So far, GE has entered into seven forward commitments for a total of $7 billion in pool insurance. About a dozen other agreements are in various stages of negotiations, according to GE officials.
Although it is unclear if the forward commitments can compete with the subordinated debt market on pricing, the device has appeal as a sort of insurance policy against that market going sour. "Our clients view the forward commitments as a hedge against the volatile mortgage-backed securities market," said Mr. Lund.
While buyers of subordinated mortgage-backed securities debt have bid down the price of credit enhancement, there are worries that investor appetite would quickly dry up if buyers suffer losses.
GE also reports an interesting new source of appetite for pool insurance: buyers of whole loans. In the third quarter, fully one-third of Ge's pool insurance business, about $1 billion, was from providing credit enhancement to whole loan trades.
This is largely being driven by FASB 115, an accounting directive that will force holders of mortgage-backed securities to mark them to market.
Investors in whole loans, however, will be exempt, thereby making whole loans more attractive.
With FASB 115 to take effect Jan. 1, GE is hopeful that it will do more such business next year.