randomwalker wrote: ↑15 Jun 2017 19:28
Purely from the subprime bank/ lender's perspective it's very much a "heads I win, tails I don't lose" type of business model, kind of like running a 2 and 20 hedge fund. It's just a simple spread business, take deposits and pay x then lend the money for X plus a few percent and repeat as long as the music keeps playing and all the while paying yourself along the way.
I think some things are being conflated here that shouldn't. Home and Equitable do "alt" and "subprime" mortgages, but they also do some prime mortgages that qualify for CMHC insurance.
Mortgages that go into NHA MBS securities and CMB bonds must be CMHC guaranteed. This means that Home and Equitable can't just throw their subprime mortgages into the pot. The mortgages must meet CMHC underwriting standards for credit score, debt service and so on. Indeed, BMO and others are trying to create mortgage-backed securities from subprime (and non-guaranteed) mortgages, which the Home mess has put a spoke into. That's different from the guaranteed mortgage securities the article is talking about.
The article seems somewhat sloppy in implying that a mortgage coming from Home/Equitable into the MBS programs is different and riskier than than from other banks. This shouldn't be the case - they all have to meet whatever requirements CMHC insurance imposes, and only a subset of Home/Equitable mortgages are going to be eligible, as opposed to a majority from the big banks that pretty much restrict themselves to this sort of borrower. The underwriting/verification scandal that caused Home to terminate those 45 brokers is of note here - it was apparently the CMHC-insurable line that they weren't doing income verification properly. That would have got CMHC's attention, but it doesn't seem that it was anything that caused CMHC to freeze Home out of the securitization process.
For derecognition, even though the mortgages have been "securitized", the original lender is still responsible for fronting the payments to the securitization in case of non-payment, replacing defective mortgages in the pool, etc. While this is so they can't be taken off the balance sheet, and the derecognition process appears to be a second transaction with someone who is willing to take that on the risk/reward of the pooled mortgages. The originator no longer has an investment stake in the mortgages, and is presumably just the servicer for a fee.