Securitization is a specialized form of financing available to all financial institutions. It’s a dynamic and multifaceted tool and a great addition to your financial toolkit. As a financial strategy for your credit union, securitization works to diversify risk, increase funding and help improve your bottom line.
Securitization is the practice of combining various debt obligations (like residential mortgages, commercial mortgages, auto loans or credit card obligations) into one consolidated debt instrument, or security, such as a bond. Once the debt obligations have been pooled, a coupon is set and paid to the bond purchaser. The underlying debt obligations secure the bond and the principal. The interest payments made by the debt holders fund the bond’s coupon.
The securitization process can create many different types of products including both mortgage-backed and other types of asset-backed securities.
Partner with Us
We are committed to credit union success. Concentra has been issuing into
Canada Mortgage and Housing Corporation (CMHC) securitization programs since 2007 so we walk the talk. We leverage the expertise we have gained through our own experience in the program for the benefit of your credit union.
When you partner with Concentra, you work with a dedicated and specialized securitization team that is second to none. We can tailor securitization solutions that meet the unique needs and business objectives of your credit union. And we will go above and beyond to ensure your credit union is successful in these programs.
We have used securitization as a funding tool throughout a full mortgage cycle. Not only have we created robust funding and hedging strategies, we have done a complete analysis of how the program has reacted to our balance sheet on a risk and profitability basis. What we glean from our own performance, we pass on to our credit union partners. Our strengths become your strengths to generate the maximum benefit from the securitization programs.
We follow rate changes and forecasts regularly, well, more like minute-by-minute. We create funding strategies, set hedges and provide guidance on issuance options for our credit union partners. This helps credit unions use the program effectively to meet their business goals. Finally, we follow the credit union system’s participation in the mortgage-backed securities (MBS) market and keep a pulse on how the marketplace receives their product.
Through Concentra’s capital market connections, credit unions have access to a wide network of possible MBS buyers. This creates a securitization service that is a truly robust, highly liquid funding source. In addition, Concentra often purchases credit union MBS for our own balance sheet, ensuring the lowest possible cost of funds to the credit union.
Competitive Advantages of Securitization – CMHC Programs
Securitization is a powerful and highly effective financial management tool. Here are the top six advantages to employing it at your credit union through
CMHC sponsored securitization programs.
Balance sheet management tool
As bonds are collateralized by the group of mortgages backing them, the amount, term and maturity perfectly reflects the underlying mortgages. Subsequently, as the monthly principle pass-through to the bondholder is required, the bonds amortize perfectly in step with the underlying mortgages. This matched term generates an interest rate risk-neutral transaction where the margin for the transaction is ‘locked-in’ to maturity.
Securitization allows you to make portions of your balance sheet completely interest rate risk neutral and adds long-term funding which could otherwise be difficult to generate through membership.
Competitive pricing to members
Mortgage rate competition has become a major constraint in the banking industry. Issuing
MBS helps to mitigate this issue, providing a low cost of matched-term funding. As the credit union can look up current market costs for
MBS before setting a promotional mortgage rate, it’s possible for the executive to determine the level of margin they are comfortable with, setting competitive rates in a more strategic mindset.
In addition, if the credit union is satisfied with the current cost of
MBS but needs a few months to generate the volumes to securitize, there is the option to hedge the transaction, locking in the current cost of funds
Sustainable long-term funding
Backed by the federal government, these bonds are low risk and very attractive to bondholders. These bonds trade in a well-established market that has been active since the program began in 1987. In the program, credit unions are able to generate large amounts of matched term funding. This is beneficial because generating significant volumes of long-term deposits can be extremely difficult and normally requires high rates to entice members to shift funds.
CMHC programs, issuers ‘borrow’ the federal government’s AAA debt rating, the bond is evaluated at the same credit risk levels, therefore pricing is consistent across the board for all issuers. As long as your credit union can generate the minimum issuance size of $2 million within the program, you’ll have access to the same cost of funding as the large chartered banks - a strategic equalizer for credit unions large and small.
The credit union system experiences many cash cycles related to membership needs, often following agricultural, commercial and residential cycles. This creates periods of time when liquidity can dry up and the credit union is in need of additional cash over and above the usual central line of credits they can access.
Because MBS pools can be issued at any time, they can be planned around expected liquidity cycles to ensure that liquidity is available at strategic times of the year when cash levels are low. This enables credit union issuers to incorporate securitization into their funding strategies and to manage their liquidity in a more sustainable fashion.
National Housing Act (NHA) MBS program includes a ‘timely payment guarantee’ to the bondholder. Issuers in the program essentially ‘borrow’ the federal government’s AAA rating. Therefore, the credit risk associated with the bond reflects that of the Government of Canada rather than that of the individual issuer. This creates a low risk assessment in the market, and consequently a low cost of liquid funds. The result is better pricing in the marketplace and higher levels of profitability through a reduction of the cost of funds on the issuers’ balance sheets.