Mortgage insurance-linked note (Bellemeade Re)
A note through which a US mortgage insurer passes to investors a tranche of the default risk on the loans it guarantees.
In the United States, a borrower who puts down less than twenty percent must buy private mortgage insurance, which repays the lender part of the loss on default. That risk is not catastrophic in the weather sense but it is in the economic sense: a recession hits every loan at once, as 2008 made plain. A mortgage insurance-linked note moves a tranche of those losses to investors through a reinsurance vehicle that issues notes backed by a reference pool of insured loans. The trigger is indemnity based: it responds to the pool's actual losses above an attachment point. The structure grew out of the capital requirements the federal mortgage agencies imposed on mortgage insurers after the crisis, and it borrows cat bond mechanics for a credit risk.
In July 2015, Arch Capital placed the first note of this kind, Bellemeade Re 2015-1, for about 300 million dollars, backed by a pool of loans insured by its mortgage insurance subsidiary.
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