Home Equity Income Trust provided additional information regarding its announcement that it intends to apply to the Minister of Finance for its operating subsidiary, Canadian Home Income Plan Corporation ("CHIP"), to continue as a federally regulated Schedule I bank.
CHIP currently operates as a financial services company exclusively dedicated to reverse mortgages. By becoming a bank, CHIP will have access to retail deposits sourced through deposit brokers and a lower cost of funding.
The Office of the Superintendent of Financial Institutions ("OSFI") recently published a draft advisory detailing the capital treatment of reverse mortgages. According to the draft advisory:
a reverse mortgage will have a risk weighting of between 35% and 100% (with deductions from capital for a reverse mortgage with a loan to value greater than 85%) depending on its initial loan to value and subsequent underwriting performance over time.
In assessing the mortgages in its portfolio at December 31, 2008, HOMEQ estimates that based on OSFI’s proposed capital treatment of reverse mortgages, HomEquity Bank’s mortgage portfolio will have an approximate risk weight of 44%. This risk weighting applies to the principal and interest lent to clients and is comparable to the 35% risk weighting of uninsured conventional mortgages. At December 31, 2008 no deduction from regulatory capital would be required in excess of the Trust’s existing reserves.
"The attractive risk weighting of our portfolio is attributable to the quality of our assets and is testament to the conservative underwriting standards and procedures we have adhered to since CHIP was founded in 1986," said Steven Ranson, President and CEO of HOMEQ.
HOMEQ’s consolidated income is derived from the spread between the interest earned on reverse mortgages and the interest paid on debt used to fund these mortgages. In obtaining a bank charter, significant benefits are anticipated in the following areas:
- Retail deposits represent a stable and cost effective source of funds that will diversify the wholesale funding strategy HOMEQ has followed since its IPO in 2002.
- Access to reliable sources of funding will enable HomEquity Bank to meet the growing financial needs of Canadian seniors thus enabling it to increase annual originations and the resultant value of its portfolio of reverse mortgages;
- Access to cost effective sources of funding will enable HomEquity Bank to achieve attractive product pricing and spreads.
- HomEquity Bank will benefit from the efficiency of being federally regulated. This will elevate reverse mortgage supervision to a consistent national standard, lending greater credibility to the product category.
"Becoming a bank is a major advancement for our business," said Steven Ranson, President and CEO of HOMEQ. "Access to retail deposits is a prudent and sensible step at this stage of our evolution and will enable us to meet the growing demand for our product experienced in recent years and increase our cash generating capabilities," he continued.
"Reverse mortgages are a critical component in retirement planning and seniors are turning to our product in increasing numbers. We are committed to constantly enhance our offering and to deliver the best value to our clients," said Pierre Lebel, Chairman of the Board of HOMEQ. "We will continue to partner with Canada’s national chartered banks, mortgage brokers, and financial planning organizations to offer our product to Canadians 60 and over."
