TD Bank moving forward with first Big Six RMBS deal

TD Bank moving forward with first Big Six RMBS deal

TD Bank moving forward with first Big Six RMBS deal

A unit of Toronto-Dominion Bank is moving forward with a transaction that would be the first widely marketed Canadian private label residential mortgage-backed securities (RMBS) deal from one of the country’s six largest banks, according to DBRS Morningstar.

The transaction will be backed by a pool of home loans worth $688.3 million that was initially originated by three smaller lenders, Bloomberg reports, adding that people familiar with the matter said that TD Securities plans to offer $450 million of top-rated securities with an expected maturity in early 2023.

Bloomberg reports that definitive terms still have to be set, as a nationwide roadshow is underway this week before the deal books are opened. In addition to being the first RMBS deal from a Canadian big bank, this will also be the first RMBS in Canada to aggregate mortgages originated by other lenders. This is a similar technique to that used by Canada Mortgage and Housing Corporation (CMHC) in the securitization of its guaranteed loans.

Last fall, a subsidiary of Home Capital issued $425 million of securities that pooled near-prime and alt-A mortgages. DBRS Morningstar rated both deals and indicated that the weighted-average borrower credit score of the last RMBS was 741, while the deal from TD’s Prime Structured Mortgage Trust will be 793.

“The mortgage pool compares favourably with recent issuances seen in the Canadian market in terms of credit-score characteristics,” rating company analysts including Tim O’Neil wrote in a recent report.

Bank of Montreal also previously created a $1.96 billion RMBS deal, although BMO purchased and retained much of the securities itself. TD Securities will keep the mezzanine and junior pieces of this latest transaction and only offer the safest part of the transaction, the bullet-pay class A notes, Bloomberg reports.

The Canadian Fixed-Income Forum, a Bank of Canada-led group made up of bond-market professionals, has been working to grow Canadian interest in RMBS. One of their suggestions is to create a public mortgage database, the details of which would be ironed out by a working group co-chaired by the Bank of Canada, the CMHC, representatives from the six largest banks and the Canadian Bankers Association on behalf of the smaller players, according to a presentation given in October.

Lenders create mortgage-backed notes by packaging property loans into securities to sell, and by doing so, the seller of the underlying assets can reduce the regulatory capital they need to cover any potential losses. They do need to meet certain requirements, however, such as transferring significant credit risk to third parties.

The volume of residential mortgages in Canada increased 5.1% from November 2018 to November 2019, according to the Office of the Superintendent of Financial Institutions (OSFI). That’s more than three times the country’s GDP growth in 2019. Uninsured mortgages grew 12% to $759.4 billion. In contrast, insured loans declined 4.6% to $469.5 billion over the same period, as the Federal government has increasingly sought to limit taxpayer exposure to the real estate sector.

Although the private RMBS market in the U.S. was plagued by low-quality mortgages and played a large part in the financial crisis, there’s been little evidence to suggest that risky mortgages are at play in Canada’s RMBS market. Mortgages are also “full recourse” in most of the country, meaning lenders can pursue borrowers for compensation even after they’ve walked away from the property.