In an asset securitization, a lender packages a pool of financial assets and sells them to a special purpose vehicle (SPV), which in turn issues asset-backed securities to investors. The proceeds received by the SPV are used to pay the lender for the pool of assets. Cash flows from the pool (principal and interest payments, proceeds from insurance claims, etc.) are used by the SPV to make principal and interest payments on the securities. This structure has been used with a wide variety of asset classes, including residential and commercial mortgages, credit card receivables, vehicle loans, equipment leases, and trade receivables.
Securitizations are well suited to asset pools that are:
- large enough to warrant the time, cost and complexity of a securitization;
- sufficiently diverse to avoid excessive volatility; and
- transferable, and otherwise unencumbered.
Lenders with suitable asset pools are attracted to the securitization structure because it provides an (often cheaper) alternative to traditional funding sources such as bank lending, corporate bonds, and equity issues. An effectively structured securitization can have the added benefit of legally insulating the lender from the assets concerned.
Securitizations involving assets with a strong collection history, or credit enhancements such as overcollateralization or a third party guarantee, can receive a high credit rating. This makes the securities issued by the SPV attractive for investors, who also derive comfort from the security over the underlying assets.
The legal issues involved in an asset securitization are numerous and complex. Counsel working in this area provide advice and assistance regarding deal structure, the perfection and assignment of security interests in the pool, public offering documentation, the enforcement of rights to realize on underlying collateral, and due diligence.
Asset securitization practice embraces advising stakeholders on structuring and implementing asset securitization transactions including structuring and financing special purpose vehicles; documenting the acquisition of assets and the issue of the appropriate securities; ensuring regulatory compliance; and advising rating agencies. Lawyers in this practice act for asset originators, dealers, trustees, agents, liquidity lenders, credit enhancers, rating agencies, and others.
In February 2016, the federal government amended the regulations to the Insurable Housing Loan Regulations under the National Housing Act (NHA) and to the Eligible Mortgage Loan Regulations under the Protection of Residential Mortgage or Hypothecary Insurance Act (PRM).
The NHA regulations apply to mortgages insured by the Canada Mortgage and Housing Corporation (CMHC), while the PRM applies to mortgages insured by private mortgage insurers.
The most significant amendments establish new insurance eligibility requirements and provide for the issuance of Canada Mortgage Bonds (CMB).
The new eligibility requirement states that “if the loan is part of a pool of loans on the direct basis of which marketable securities are issued, any securities issued on the direct basis of the pool after July 1, 2016 must be guaranteed [by CMHC].”
According to a Torys LLP bulletin, CMHC has two securitization programs. One program consists of NHA mortgage-backed securities from approved CMHC-approved issuers who pool insured mortgages and issue NHA mortgage securities backed by these pools
(NHA MBS). The other program involves term bonds, called Canada Mortgage Bonds, secured by NHA mortgage-backed securities issued by approved sellers.
“For both of these programs, CMHC charges a guarantee fee which has been steadily increasing in the past two years and the federal government controls the amount of NHA MBS and CMB that it will permit CMHC to guarantee each year,” Torys says. “Therefore, approved issuers and approved sellers have no assurance that they will be allowed to issue as much NHA MBS (either to the market or to Canada Housing Trust) as they wish or that it will continue to be economical for them to do so.”
The second significant amendment requires the securitization of portfolio insured mortgage loans pursuant to a CMHC program with six months of their being insured. The amendment also applies to portfolio insured mortgage loans released on maturity of NHA MBS.
The six-month requirement is subject to certain exceptions that kick in when a loan becomes insured individually, has fallen into arrears before the end of the six-month period, or when the loan has been privately secured as permitted by the regulations. The final exception allows portfolio insurance coverage for a maximum of 5 per cent of insured loans that do not satisfy the requirement in cases where 95 per cent of the portfolio’s meets the requirement or comes within the exceptions.
NEW CONFLICTS RULES UNDER ONTARIO PPSA
On December 31, 2015, Ontario introduced new rules for determining the location of a debtor when applying the relevant Ontario conflicts of law rule. The amendments to the Personal Property Security Act
affect secured parties who have purchased receivables under securitization or factoring arrangements, and others.