Home Capital Group

This is from this company's annual report. I'm trying to understand how their securitization process works and what they keep on the books.

What are interest only strips?

They mention that 64 million securitization receivable that they place on their balance sheet - what is this for?


The Company’s subsidiary, Home Trust, securitizes residential mortgage loans, and in these securitizations Home Trust retains interest only strips and servicing responsibilities. The retained interests consist of Home Trust’s rights to future cash flows arising after the
investors in the special purpose entity have received the return for which they contracted. The investors and the special purpose entity
have no recourse to other assets of either the Company or Home Trust for failure of debtors to pay when due. During the year, Home Trust sold $692.3 million (2006 – $546.3 million) of mortgages receivable in securitization transactions. This value is subject to
prepayment and interest rate risks on the transferred receivables. The retained interest in the securitization receivable recorded on the consolidated balance sheet for securitization transactions totaled $64.0 million (2006 – $51.0 million). Since these loans are
transferred on a serviced basis, Home Trust has a servicing liability of $1.8 million (2006 – $1.4 million) included on the consolidated
balance sheet. Mortgage payments, which have been collected and are payable to the National Housing Authority (NHA) trusts, as at
December 31, 2007 totaled $35.8 million (2006 – $28.0 million) and are reported under other liabilities. There are no expected
credit losses as the mortgages are guaranteed by Canada Mortgage and Housing Corporation, an agency of the federal government.
During the year, the Company expanded its loan securitization program by participating in the Canada Mortgage Bond (CMB) program.
Total mortgage receivables of $119.6 million (2006 – nil) were transferred. The securitization receivable includes $7.8 million (2006 – nil)
for the CMB retained interest. A servicing liability of $0.2 million is included on the consolidated balance sheet.
The impact of securitizations on the consolidated statement of income for the years ended December 31 is as follows: