There are many different types of products that are created as a result of securitization including both mortgage-backed and asset-backed securities. In our previous blog post, we explained that securitization is the practice of combining various debt obligations, such as residential mortgages, commercial mortgages, auto loans or credit card obligations into a consolidated debt instrument, or new security, such as a bond.
Today, I’m discussing a Canadian Mortgage-Backed Securities (MBS) program – the National Housing Act MBS (NHA MBS ) program.
NHA MBS is well suited to credit unions. It’s an amortizing security where the remaining balance on the bond reduces as principle is paid down and mortgages are liquidated (due to sale, foreclosure or other reasons the mortgage may be paid off). Also under this program, the coupon payments on the NHA MBS are guaranteed by CMHC. The coupon payment on the amortizing bond, reflects a ‘pass through’ of principal and interest the issuer is collecting from the borrower. Embedded in this program is a ‘timely payment guarantee’ from CMHC providing bondholders payments guaranteed by the federal government.
- Simplest securitization structure: In a NHA MBS transaction the mortgages are pooled and the MBS is sold to an investor. There are no complex instruments added to the transaction.
- Amortizing funding: From a balance sheet perspective, NHA MBS creates a liability that directly offsets the asset (underlying mortgages). As the asset amortizes so does the liability, at the exact same rate. It is perfectly matched!
- Flexible term: NHA MBS has a great deal of flexibility. Pools can be created with any term. An issuer could create a 1-year MBS or 5-year MBS, there is no restriction on term.
- Flexible timing: NHA MBS have flexibility in regards to when they issue and settle their pools. NHA MBS can be issued within any month and have a settlement date that is only constrained by the ability to produce the required data, forms and subject to the time required for typical settlement procedures.
- Issuer discrimination: Lessor known issuers may face higher prices as investors do not have the required information to properly assess the MBS. Each MBS has factors that affect how the MBS reacts (Ex. Prepayment rates, liquidations, foreclosures, etc.) the less that is known about the behavior the higher the return required by the investor.
- Pool size discrimination: The smaller the pool size the lower the perceived liquidity of the bond. This lack of liquidity can cause investors to require a higher yield on the investment and increase the costs to the issuer.
Securitization and MBS solutions have been key to our balance sheet management strategies. We can help your credit union through the process to become an approved issuer of Mortgage-Backed Securities, such as the NHA MBS program. Please feel free to contact us at Concentra – Securitization firstname.lastname@example.org.
Stay tuned for the next blog post where we’ll look at the advantages and disadvantages of the Canada Mortgage Bond program.
Kurtis Nagle, Securitization Analyst, Residential Markets