Canada EH

In an effort to broaden its investor base and to take advantage of the US asset-backed securities market, the Canada Mortgage and Housing Corporation has sold a pool of non-guaranteed mortgage loans to General Electric Capital Corporation. After discussions with the rating agencies, GE Capital has decided to securitize the pool by selling it to a Special Purpose Vehicle called Canada Enhanced Homes Trust 1. The Trust will finance the purchase by issuing two public bonds and placing an unrated tranche with a US hedge fund. The details of the pool and the asset-backed securities are shown below.

CANADA EH TRUST 1

CMHC/GE Capital Corp.

Pool total	C$300 million
Pool interest rate	7.125%
Pool maturity date	5 years
Pool payments	Equal payment amortizing loans
Pool payment frequency	Monthly
Pool average loss rate	0.75% p.a.
Servicing fee	0.50% p.a.
Trust Note A	C$200m AAA Maturity 3.6 years
Trust Note B	C$70m AA Maturity 4.6 years
Trust Certificate C	C$30m Nonrated Maturity 5 years
Trust principal paydown	Sequential pay

Your task is to explain this deal to the CMHC mucky-mucks, and explain to them how the sequential-pay ('waterfall") structure can affect the cost of funding the pool. You should also indicate how prepayments can affect the average life and funding cost of the asset-backed securities. You can use and adapt the following spreadsheet:

waterfall.xls

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Assignments:

• Describe the legal structure of this securitization, using a diagram.
• When will the A, B and C tranches be paid back? What is the weighted average life of these securities?
• What is the estimated cost of funding the trust? (Use the Canadian Government bond curve and corporate bond spread tables tables at bondsonline.com.)
  
• How would your answers change if Canadians prepay their mortages at the rate of 2% per month?