Originally published on October 28, 2014
There are many different types of products that are created as a result of securitization including both mortgage-backed and asset-backed securities. In a previous blog post, I 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. It’s a financial strategy that when used effectively works to diversify risk and help improve the bottom line of credit unions.
At Concentra, we focus on providing MBS solutions to credit unions, as well as using the same to meet our own business needs.
Today, I’m introducing you to the Canada Mortgage Bond (CMB) program, an extension of the NHA MBS program. Canada Housing Trust, a special purpose trust, issues a bond on a quarterly basis. The proceeds from the bond issuance are used to purchase NHA MBS from issuers that have expressed interest in selling NHA MBS into the program for that quarter. This bullet bond is issued in capital markets and semi-annual interest is paid to the investors in the bond.
- Best cost of funds: Issuers typically achieve the best cost of funds through this program by utilizing the Government of Canada’s name as the issuer instead of the issuers own. Since the CMB bond is an aggregation of multiple pools, the issuance is very liquid which helps drive better pricing.
- Consistent quarterly issuances: As a result of the CMB bond launching every quarter, issuers know they have a guaranteed buyer for their MBS on a quarterly basis and can plan accordingly
- Non- Amortizing complex structure: The CMB is a bullet bond that pays coupon payments on a semi-annual basis. A bullet bond leads to the investor receiving principle upon maturity of the bond; conversely an amortizing bond pays principal and interest payments throughout the life. As a result of the amortizing asset and non-amortizing liability, issuers need to top up their accounts to replace the amortized amount and fully collateralize the required liability. Derivatives are also required as part of the transaction.
- Stringent term and timing: The bond is issued on a fixed schedule, thus, issuers are required to abide by strict timelines in order to sell their NHA MBS into the CMB program
Securitization is a dynamic and multi-faceted strategy and can provide tremendous value to credit unions looking to diversify their portfolios and improve return on investment in order to be competitive and meet member needs. Our experts at Concentra are here to help credit unions achieve their business goals. Contact us to learn more at Concentra securitization.
Kurtis Nagle, Securitization Analyst, Residential Markets