Credit Default Swaps
Credit default swaps are typically used to obtain capital relief. In this structure, the mortgage lender enters into a credit default swap agreement with an intermediary bank that guarantees to repay foreclosure-related losses on the lender’s mortgage portfolio. The intermediary bank then enters into a back-to-back swap agreement with a special purpose vehicle. (Alternatively, the mortgage lender can sell notes to an intermediary bank, which then enters into a swap agreement with the special purpose vehicle.) PMI Europe provides a policy to the special purpose vehicle ultimately covering an agreed portion of the mortgage default risks. This structure can significantly reduce regulatory capital charges.
