DBRS Morningstar Finalizes Provisional Rating of AAA (sf) on CHIP Mortgage Trust’s Series 2021-1 Medium Term Notes

DBRS Limited (DBRS Morningstar) finalized its provisional rating of AAA (sf) on the Series 2021-1 Medium Term Notes (the Notes) issued by CHIP Mortgage Trust (the Trust). All senior notes issued by the Trust rank pari passu with each other.

The Notes have a coupon rate of 1.503% and an Expected Final Payment Date of November 15, 2024. If the Notes are not fully repaid on the Expected Final Payment Date, the Notes will start to amortize and pay monthly interest equal to the one-month Canadian Dollar Offered Rate plus 1.60% per year until they are fully repaid. DBRS Morningstar’s rating is an opinion on the risk that the Trust will fail to fully repay the Notes by the legal maturity date, which is November 15, 2046.

On June 18, 2021, the DBRS Morningstar Sovereigns group published its updated outlook on the impact on key economic indicators for the 2021–22 time frame. The initial outlook was published on April 16, 2020, and has been updated periodically since. For details see https://www.dbrsmorningstar.com/research/380281. For the ratings assigned, DBRS Morningstar’s analysis considered adjustments to assumptions as a result of the global efforts to contain the spread of the Coronavirus Disease (COVID-19). In connection with the DBRS Morningstar Sovereigns group's moderate economic scenario, DBRS Morningstar applied adjustments that result in an immediate 2.5% haircut to property values for all loans. This haircut is to account for potential declines in property values as a result of the coronavirus pandemic and is in addition to the typical property value stresses applied by DBRS Morningstar.

The AAA (sf) rating is based on the following factors:

(1) The level of credit enhancement equal to a minimum of 5% of the asset balance (based on the limit on senior debt issuance of up to 95% of the aggregate outstanding asset balance) is commensurate with the rating assigned. Credit enhancement is provided by a combination of (a) a minimum cash reserve equal to six months of interest on the Notes to mitigate cash flow irregularity, (b) overcollateralization, and (c) subordination (if applicable).

(2) The conservative underwriting standards associated with the origination of the reverse mortgages, including the use of qualified appraisers; the reduction of appraised values based on the region, property quality, property type, and specific location to reflect potential market illiquidity or housing value volatility; and the use of conservative actuarial tables in determining the expected occupancy term, resulting in low historical losses. Only 114 out of the more than 12,000 reverse mortgages ever purchased by the Trust (as of March 31, 2021) have experienced a loss, meaning the amount owing at the end of the occupancy term exceeded the net proceeds from the sale of the property. All reverse mortgages have at least 60% equity in the underlying properties at origination and the current mortgage portfolio held directly by the Trust has a weighted-average loan-to-value ratio (weighted by current loan amount) of 44.9% (as of April 30, 2021), as calculated by DBRS Morningstar.

(3) The extensive experience of HomeEquity Bank in originating, underwriting, and servicing reverse mortgages, along with the level of ongoing review and reappraisal of the properties. Reappraisal of properties occurs on a formal basis at least every five years.

(4) The assets are a large, diversified portfolio of reverse mortgages with a first-ranking charge on residential properties across Canada.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Residential Mortgages, Home Equity Lines of Credit and Reverse Mortgages (November 3, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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