With the completion of the first term securitization of Alt-A mortgages in Canada, the market is now ripe for these types of deals going forward.
GMAC Residential Funding of Canada last week announced the closing of its $278 million securitization of Alt-A loans, which is its first mortgage-backed deal in the country.
"Alt-A mortgages have been securitized historically in the ABCP market, and so, to a degree, what we are proving in this execution is that you could get right to the term market," said Bob Conway, managing director at GMAC Canada. He added that the deal was well sold and investors seemed happy to see a new name issuing MBS.
The bonds were sold to investors in Canadian ABS and CMBS. However, Conway hopes that even investors in Canada Mortgage Bonds - who are accustomed to semi-annual, fixed-rate, triple-A rated, bullet maturity bonds issued by the Canada Housing Trust as part of Canada Mortgage Housing Corporation's (CMHC) housing program - will eventually take to the Alt-A product, despite the fact that these deals usually have a senior/subordinate monthly-pay structure.
Although this is the first securitization of Alt-A mortgages in Canada, there are a growing number of companies offering this type of product. A positive offshoot of this development is that it is now easier for people who are self-employed to get a mortgage. Before, these borrowers were either not getting mortgages or were able to get mortgages but not on terms that they could get for a comparable loan in the U.S., explained Conway.
Unlike in the U.S., the definition of the Canadian Alt-A is likely to remain static. In Canada, the average Alt-A borrower usually has a FICO score of about 620 and a mortgage of about C$150,000. These mortgages are niche-type properties for self-employed borrowers with stated income or investment and vacation properties.
The growth of the Alt-A market is expected to lead to the broadening of the MBS market. For one, there is now the possibility of eventually developing a mature subprime market in the country, which might lead to a securitization market in the area as well. The presence of U.S.-based companies such as Household Finance Corp. and Wells Fargo, as well as local mortgage firms like Xceed Mortgage and Home Trust, is furthering this evolution. Although GMAC Residential Funding of Canada originates subprime loans currently, it does not have the critical mass yet to securitize the product.
GMAC-RFC established Residential Funding of Canada in 2002 and funded the first loan in the country in January last year. Last May, RFOC formed Canadian Mortgage Acceptance Corp. (CMAC) to fund the originations of its array of mortgage products.
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