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Bank of Montreal to offer mortgage-backed securities

Bank of Montreal on Bay St. from King St. West, in Toronto.

Fred Lum/The Globe and Mail

Bank of Montreal is bundling nearly $2-billion of prime Canadian mortgages into securities, in a first-of-its-kind deal as the government looks to reduce support for the fast-growing housing sector.

The bonds are backed by prime residential mortgages that are not insured by the government. Canadian banks have historically packaged federally guaranteed loans into bonds, but last year the country tightened access to taxpayer-backed mortgage backing, in an effort to help tamp down rapid home-price growth in areas such as Toronto and Vancouver. The mortgage-backed securities offering is the first from a major Canadian bank to bundle uninsured prime mortgages.

"This is a really unique deal in the Canadian market," Richard Hunt, an analyst at Moody's Investors Service who rated the deal, said in an interview. "Given the pent-up demand that we think is out there on the part of banks and non-banks to have a vehicle to fund their residential mortgages, to have an RMBS market, we think this could be a significant transaction."

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The bond is backed by $1.96-billion of prime residential mortgages, more than half of which are in Ontario and Quebec, according to a Moody's pre-sale report. Around 95 per cent of the securities in the transaction will be rated Aaa. The lowest rated portion will be B2, and there is a non-rated portion as well, the bond grader said. Representatives for Bank of Montreal were not immediately available for comment.

The bank will offer to renew the mortgage loans at the end of their term if the borrower is not in default, and if the borrowers satisfies the bank's underwriting criteria at the time, which mitigates some of the risk of borrowers not being able to refinance. Canadian mortgage loans generally have a five-year term, and borrowers pay down their principal at a 25-to-30-year pace meaning they usually have to refinance a significant portion of their loan every five years.

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