DBRS Morningstar Finalizes Provisional Rating of AAA (sf) on CHIP Mortgage Trust’s Series 2023-1 Medium Term Notes

DBRS Limited (DBRS Morningstar) finalized its provisional rating of AAA (sf) on the Series 2023-1 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 of 6.069% and an Expected Final Payment Date of November 14, 2028. 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 Daily Compounded CORRA plus 2.70% 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 14, 2048.
The AAA (sf) rating is based on the following factors:

(1) The level of credit enhancement equal to a minimum of 7% of the asset balance (based on the limit on senior debt issuance of up to 93% 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. Since 2000, only 125 out of the more than 13,000 reverse mortgages purchased by the Trust (as of March 31, 2023) 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 45.2% (as of May 31, 2023), 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.

DBRS Morningstar’s credit rating on the Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this Press Release.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

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

The principal methodology applicable to the credit rating is Rating Canadian Residential Mortgages, Home Equity Lines of Credit and Reverse Mortgages (November 3, 2022; https://www.dbrsmorningstar.com/research/404833).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating was initiated at the request of the rated entity. The rated entity or its related entities did participate in the credit rating process for this credit rating action. DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action. This is a solicited credit rating.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

Operational Risk Assessments for Canadian Structured Finance (April 4, 2023; https://www.dbrsmorningstar.com/research/412270)

Legal Criteria for Canadian Structured Finance (June 20, 2023; https://www.dbrsmorningstar.com/research/416101)

Derivatives Criteria for Canadian Structured Finance (June 16, 2023; https://www.dbrsmorningstar.com/research/415974)

Financial Obligations:
• Series 2023-1 Medium Term Notes, Accrued Interest Component
• Series 2023-1 Medium Term Notes, Principal Component

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