Home Capital Group to sell $425M worth of uninsured mortgage-backed securities

Alternative mortgage lender Home Capital Group plans to sell $425 million worth of its uninsured mortgages to investors, its first sale of so-called mortgage-backed securities since the financial crisis and a move likely to be welcomed by the Bank of Canada.

The Toronto-based lender says it plans to sell the first tranche of the loans in a private placement that will close by Friday.

The investments, which consist of some of the lenders mortgage loans bundled together and sold off to secondary buyers, will pay a rate of 3.011 per cent.

Home Capital says the underlying loans are all residential mortgages to what it calls “near-prime” borrowers, and the loans are uninsured. They will only be available to accredited investors, not the general public.

By bundling the loans to get them off its books, Home Capital can raise money to give out in new mortgages, and also spread the risk of default around. That’s something that no less an authority than the Bank of Canada has said it would like to see more of to make the financial system more stable.

Currently, most of Canada’s housing market is backstopped by the taxpayer-backed Canada Mortgage and Housing Corporation, which means the government is on the hook for almost all of the risk.

The CMHC  also sells mortgage-backed securities, but only for insured mortgages. And uninsured mortgages are a growing chunk of Canada’s mortgage market.

In a press release, Home Capital’s chief financial officer Brad Kotush said the plan could be “an attractive funding option for us,” and suggested it may sell even more down the line. “We expect to be a serial issuer of these securities in the future,” he said.

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