GMAC Residential Funding Corp. says its recent securitization of Canadian mortgages is a first step toward offering more flexible terms to borrowers there.
The Minneapolis unit of General Motors Corp. has been lending in Canada for two years. Last week it announced that it had completed the first sale of bonds with maturities longer than a year backed by Canadian alternative-A loans. (It was also the first public, nongovernment bond issue with such maturities backed by any kind of mortgages there since 1998.)
Bob Conway, the managing director of Residential Funding of Canada, a division of GMAC Residential Funding, said that by developing a market for "term" mortgage-backed securities, his company will expand the secondary market in Canada and provide cheaper financing for consumers.
An inefficiency in the Canadian alternative mortgage market is the imbalance between funding and lending maturities, he said. For years lenders have funded nonprime loans with asset-backed commercial paper with maturities of several months. The loans, on the other hand, typically amortize over 25 years and have balloon payments after the third or fifth year, requiring the borrower to refinance several times.
The mismatch forces Canadian lenders to hedge their loans "synthetically with interest rate swaps," which can be more expensive than simply matching the terms with a longer-term issuance, Mr. Conway said. In the United States, "the standard residential MBS deal is 'Whatever the term of the assets is, is the term of the security.' "
Eventually, he said, GMAC could offer Canadians loans with balloons that come due after seven years or longer. However, the securitization announced last week consisted of loans with three- and five-year balloons, and its next deal this year probably will, too.
"This hasn't been an active asset class for investors," Mr. Conway said. "By continuing to develop this marketplace, we hope to offer broader choices to Canadian consumers. Now that we know what our economics are, we can do longer-term mortgages, offer different prepayment options, [and] offer different amortization options."
RFC sold the $210.5 million of bonds to insurance companies, money managers, and pension funds. The next deal will be of similar size, he said.
The senior bonds had an average life of roughly three years and a coupon of 4.21%.
Residential Funding of Canada has 35 employees and is based in Toronto. It gets its loans through Mortgage Intelligence, a brokerage in the Toronto suburb of Mississauga which originates for a wide range of Canadian lenders.
