DBRS Confirms All Ratings of CHIP Mortgage Trust

DBRS has today confirmed all the outstanding rated notes issued by CHIP Mortgage Trust (the Trust) as follows:

-- AAA (sf) for Series 2010-1 Medium Term Notes
-- AAA (sf) for Series 2011-1 Medium Term Notes
-- AAA (sf) for Series 2013-1 Medium Term Notes

As of December 31, 2013, the Trust also had unrated senior short-term notes outstanding but no subordinated notes. As all the notes (the Notes) are supported by the same portfolio of reverse mortgages, all senior notes rank pari passu with each other.

The confirmation is part of DBRS’s continued effort to provide timely credit rating opinions and increased transparency to market participants.

The confirmation is based on the following factors:

(1) Protection to the Notes comes from (i) a minimum cash reserve equivalent to six-months of interest payable on the Notes that mitigates the risk of any cash flow irregularity and (ii) the Trust is limited to debt issuance up to 95% of the aggregate balance of reverse mortgages in senior-ranked notes and up to 98% of the aggregate balance of reverse mortgages in all notes. The Trust continues to comply with these covenants, with a senior debt-to-mortgage ratio and total debt-to-mortgage ratio of 89.4% as of December 2013. Both ratios are the same, as there are no subordinated notes outstanding.

In addition, the Notes are protected by the equity in the underlying properties and excess spread. The average loan-to-value (LTV) of the portfolio has been increasing slightly over the last four years, as the Trust has not acquired any new reverse mortgages since October 2009 after HomEquity Bank began operating as a federally regulated Schedule I bank, diversifying its funding alternatives. However, the Trust may purchase reverse mortgages at some point in the future. As of December 31, 2013, the LTV of the portfolio stood at 40.9%.

Furthermore, Series 2010-1 and Series 2011-1 Notes benefit from the unconditional guarantee as to payment of principal and interest provided by HOMEQ Corporation, the ultimate parent.

(2) The conservative underwriting standards associated with the origination of the reverse mortgages, including (i) the use of qualified appraisers, (ii) the reduction of appraised values by region, property quality, property type and potential market illiquidity adjustments in specific locations and (iii) the use of conservative actuarial tables in determining the expected occupancy term.

(3) The assets are a large diversified portfolio of reverse mortgages for residential properties situated in or near major urban centres across Canada, with expected concentration in Ontario.

(4) The level of ongoing review and reappraisal of the properties associated with the reverse mortgages. Reappraisal of properties occurs on a formal basis at least once every five years.

(5) HomEquity Bank, which directly owns the Trust, is the servicer and has extensive experience in originating and administering reverse mortgages in Canada.

(6) A first-ranking charge for noteholders on all the assets and undertakings of the Trust.

The Trust is structured as an unincorporated open-end investment trust.

DBRS monitors the performance of the transaction to identify any deviation from DBRS’s expectation at issuance and to ensure that the ratings remain appropriate. The review is predicated upon the timely receipt of performance information from the related providers. The performance and characteristics of the reverse mortgage portfolio and the Notes are available and updated each month in the Monthly Canadian ABS Report (see Related Research below).

Notes:

All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Canadian Structured Finance Surveillance, Rating Canadian Structured Finance Transactions – Appendix: Reverse Mortgages and Legal Criteria for Canadian Structured Finance, which are available on our website under Methodologies.