Bank of Montreal (TSE:BMO) plans first-of-its-kind mortgage-backed bond

Bank of Montreal (TSE:BMO, Mkt cap 63.98B, P/E 13.05, Div/yield 0.88/3.57, EPS 7.56, Shares 651.65M), one of the "Big Five" banks in Canada, is to bundle nearly C$2 billion of prime Canadian mortgages into securities, Moody's said in a pre-sale report on Monday.

The bond is backed by C$1.96 billion of prime residential mortgages that are not insured by the government. More than half of the mortgages are in Ontario and Quebec.

According to Bloomberg News, the mortgage-backed securities offering is the first from a major Canadian bank to bundle uninsured prime mortgages.

Canadian banks have historically packaged federally guaranteed loans into bonds, but the government is looking to reduce support for the fast-growing housing sector.

"This is a really unique deal in the Canadian market," Richard Hunt, an analyst at Moody's who rated the deal, said in an interview with Bloomberg News. "Given the pent-up demand that we think is out there on the part of banks and non-banks to have a vehicle to fund their residential mortgages, to have an RMBS (residential mortgage-backed securities) market, we think this could be a significant transaction."

About 95% of the securities will be rated 'Aaaa', Reuters reported.

Canadian mortgage loans generally have a five-year term, which means that borrowers usually have to refinance a significant portion of their loan every five years.

BMO will offer to renew or refinance the mortgage loans at the end of their term if the borrower is in compliance with the bank's underwriting criteria at that time.

"Canada's one of the few jurisdictions that doesn't have a developed RMBS market; this could be the first step to getting that going on," Hunt told Reuters.

Bank of Montreal (TSE:BMO) is a Toronto based financial services company. The Bank provides a range of retail banking, wealth management, and investment banking products and services. It conducts its business through three operating groups: Personal and Commercial Banking, Wealth Management and BMO Capital Markets. The Bank operates primarily in Canada and the United States. It also has operations in the United Kingdom, Europe, the Caribbean and Asia. It also serves customers through its wealth management businesses: BMO Nesbitt Burns, BMO InvestorLine, BMO Private Banking, BMO Global Asset Management and BMO Insurance. BMO Capital Markets, its investment and corporate banking and trading products division, provides a suite of financial products and services to North American and international clients. In the United States, BMO serves customers through BMO Harris Bank, based in the United States Midwest with more than two million retail, small business and commercial  customers. More from Reuters »

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