Banks Push Canadian Nonprime Mortgage-Bond Revival With New Deal

(Bloomberg) -- Banks are marketing what could be one of Canada's first nonprime residential mortgage-backed securities deals since the global financial crisis.

National Bank of Canada has held discussions with investors about a bond backed by a pool of residential mortgages just below prime-credit quality, Derek Norton, MCAP Corp.'s chief executive officer, said. The so-called alt-A mortgages are originated by MCAP, one of Canada's largest alternative mortgage-financing companies.

Discussions held this week with investors are still in the early stages and the initial tranche would be less than C$100 million ($75 million), according to a person familiar with the matter, who asked not to be identified because the deal is private. It should grow into a “significant” funding vehicle, the person said.

“This is to the best of our knowledge the first kick at the can and it's a small start,” Norton said. MCAP's 2014 prime RMBS is the only deal the market has seen since the financial crisis, he said.

A representative for Montreal-based National Bank of Canada declined to comment.

The deal comes amid concern that Canada's housing market is in a bubble, driven by soaring prices particularly in Toronto and Vancouver. Although the country escaped the worst of the 2008 financial crisis, Canada's non-bank short-term commercial paper market backed by residential mortgages collapsed in August 2007 amid the U.S. subprime meltdown.

Market Disappeared

New Latitude Capital Corp., a Canadian uninsured mortgage lending platform, has created a trust that will buy mortgages and issue various rated and unrated tranches of securitized debt, according to a person familiar with the matter. Subprime borrowers are generally considered to be homebuyers with FICO scores below 620 and mortgages with a loan-to-value ratio above 80 percent. The credit scoring scale from Fair Isaac Corp. ranges from 300 to 850.

New Latitude Capital declined to comment.

The market for uninsured residential mortgage-backed securities has largely disappeared since the crisis, with only one deal from MCAP in 2014. The alternative lender, which has more than C$61 billion in assets according to its website, has an outstanding C$200.8 million program backed by a pool of uninsured, first-lien prime residential mortgages in Canada with a maximum loan-to-value ratio of 80 percent at origination, according to a report from credit-rating firm DBRS.

Renewed Interest

But Canada could see a renewed interested in RMBS funding after changes introduced by the federal government last year tightened access to government mortgage insurance and forbid putting insured house loans in private securitization pools, according to a Moody's Investors Service report. Canada's mortgage-backed securities market is dominated by C$441 billion outstanding in National Housing Act mortgage-backed securities insured by Canada Mortgage and Housing Corp.

“I think the new rule changes are going to create an opportunity for us to do some more,” Norton said, noting that it was still too early but they are looking.

Uninsured mortgages could also flow into Canada's commercial-paper market backed by residential debt. The market for such securities, which has a typical duration of 45 to 60 days, is about C$17 billion in debt backed by residential mortgages, DBRS said in a report in December.

To contact the reporter on this story: Allison McNeely in Toronto at amcneely@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Jacqueline Thorpe