On face of it, Jim Wagner is cruising down Easy Strect.

He is vice president of Capital Markets for PMI Mortgage Insurance, responsible for the company's booming business of insuring loans that back privately issued mortgage securities.

PMI wrote $12.5 billion of this "pool" insurance last year, up from $5.2 billion in 1991. That has left the company with nearly 50% of the market.

But PMI, based in San Francisco, is facing a big threat from an alternative form of credit enhancement for mortgage securities.

Dividing the Deals

Lenders and other private issuers have increasingly been winning investment-grade ratings for their securities by dividing the deals into senior and subordinated classes.

The subordinated classes, which represent a small portion of the issues, are the first to absorb any credit losses.

That allows the senior paper to get high credit ratings.

"Right now, we see senior/subordinated as the biggest competitor," Mr. Wagner says.

Low Interest Rates Cause Lift

Indeed, 60% of the private mortgage securities issued in the first quarter of this year used the senior/subordinated structure, up from 48% in 1992, according to PMI.

Much of the increase, analysts say, stems from the low interest rates of the past two years. Yield-hungry investors have been drawn increasingly to the subordinated classes, making the deals attractive for issuers.

"The use of senior/subordinated has become more viable because of the development of a market for the subordinated debt," said Alex Zabik, an analyst with Fitch Investor Services.

Brisk Business

When demand for subordinated classes was weaker, issuers often were forced to hold the subordinated classes themselves, Mr. Zabik said.

So what's the prognosis for pool insurance?

Mr. Wagner of PMI maintains that the market will see pool insurance in a new light if investors begin to take significant hits on subordinated classes.

Raising Rates

In the meantime, PMI is still doing brisk business in pool insurance, as the refinancing boom lifts the overall mortgage market to record levels.

Certainly the company isn't resorting to cutting its credit standards. To the contrary, PMI has decided to tighten underwriting criteria in California and parts of Washington, responding to increased losses in those areas, Mr. Wagner said.

Effective Aug. 15, PMI will raise its rates on pool insurance for properties in California and two counties in Washington.

And nationwide, the company plans to stop writing insurance on pools containing mortgages greater than $650,000.

That will take effect Sept. 1.

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