Bank of Montreal 2008 Annual Report Download - page 67

MD&A
BMO Financial Group 191st Annual Report 2008 | 63
Subprime and Alt-A loans are generally considered to carry
higher risk than traditional prime loans. We also consider loans
to customers with credit scores between 620 and 660 and a loan-to-
value ratio above 80% (without private mortgage insurance) to be
a higher-risk component of our portfolio. This component of the U.S.
loan portfolio was negligible.
In Canada, we do not have a mortgage program that we consider
Alt-A. As part of our credit adjudication process, we may choose not
to verify income or employment for customers when there are other
strong characteristics that support the creditworthiness of the loan.
We also have a Newcomers to Canada/non-resident mortgage program
that permits limited income verification but has other strong qualifica-
tion criteria. At October 31, 2008, there was approximately $2.2 billion
outstanding under this program. Of this, only $11 million or 0.51%
was 90 days or more in arrears, reflecting the strong credit quality
of these loans.
Home Equity Products
Home equity products are secured by the homeowner’s equity and rank
subordinate to any existing first mortgage on the property. In the
United States, we have a US$5.0 billion home equity loan portfolio, which
amounted to 2.5% of BMO’s total loan portfolio at October 31, 2008.
Of the total portfolio, loans of US$0.4 billion were extended to customers
with original credit bureau scores below 620, and would be categorized
as subprime loans. Of these, only US$3 million or 0.8% of the loans
were 90 days or more in arrears as at October 31, 2008.
BMO also offered two limited documentation programs within the
home equity portfolio in the United States, which would be categorized
as Alt-A if they were in the first mortgage loan portfolio. As of
October 31, 2008, the amount authorized under these programs was
US$1.0 billion, and US$0.6 billion was outstanding. Loans made under
these programs have the same strong credit score and loan-to-value
requirements as the first mortgage loan portfolio, and as such the
portfolio has performed well. As at October 31, 2008, US$4 million
or 0.68% of the portfolio was 90 days or more in arrears. This compares
with a rate of 0.57% for BMO’s total U.S. home equity loan portfolio.
We discontinued these programs in the third quarter of 2008.
We also consider home equity loans to customers with credit bureau
scores above 620 but below 660 to be a higher-risk component of
the loan portfolio. This component of the portfolio was US$0.3 billion as
at October 31, 2008. Of these, US$3 million or 0.88% of the loans were
90 days or more in arrears.
Loans having a loan-to-value ratio higher than 90% at issuance
represent US$0.4 billion or 7% of the U.S. home equity loan portfolio
as of October 31, 2008. Loans having a loan-to-value ratio higher than
80% to customers with a credit bureau score below 660 at the time
of issuance represent US$0.3 billion.
In Canada, we have a $13.8 billion home equity line of credit
portfolio ($30.1 billion authorized). The portfolio is high quality,
with only 0.08% of loans in the portfolio 90 days or more in arrears.
Of these lines of credit, one product line is offered only in first mortgage
position and represents approximately 54% of the total portfolio.
We also have a $0.3 billion home equity instalment loan portfolio,
with only 0.23% of loans in the portfolio 90 days or more in arrears.
Leveraged Finance
Leveraged finance loans are defined by BMO as loans to private equity
businesses and mezzanine financings where our assessment indicates
a higher level of credit risk. BMO has limited exposure to leveraged
finance loans, representing less than 1% of our total assets, with
$3.6 billion outstanding as at October 31, 2008 ($5.8 billion authorized).
Monoline Insurers and Credit Derivative Product Companies
At October 31, 2008, BMO’s direct exposure to companies that
specialize in providing default protection amounted to $573 million in
respect of the mark-to-market value of counterparty derivatives and
$19 million in respect of the mark-to-market value of traded credits.
Approximately 88% of the $573 million exposure is related
to counterparties rated AA or better and approximately 53% of the
$19 million exposure is related to counterparties rated BBB– or better.
The notional value of direct contracts involving monoline insurers
and credit derivative product companies was approximately $4.5 billion.
Most contracts with these companies relate to collateralized debt
obligations and credit default swaps within our trading portfolio and
provide protection against losses arising from defaults. These instru-
ments have minimal subprime exposure. At October 31, 2008, BMO also
held $1,176 million of securities insured by monoline insurers, of which
$795 million were municipal bonds. Approximately 79% of the municipal
bond portfolio is rated investment grade, including the benefits of
the insurance guarantees. Approximately 68% of the municipal bond
holdings have ratings exclusive of the insurance guarantees and
all of those are rated investment grade.
BMO-Sponsored Securitization Conduits
BMO sponsors ten securitization conduits which are not consolidated,
consisting of three Canadian vehicles that hold BMO assets (Bank
Securitization Vehicles), six client-funding vehicles in Canada (Canadian
Customer Securitization Vehicles) and one client-funding vehicle in
the United States (U.S. Customer Securitization Conduit). We earn fees
for providing services related to the securitizations, including liquidity,
distribution and financial arrangement fees for supporting the ongoing
operations of the vehicles. These fees totalled approximately
$68 million in 2008 and $80 million in 2007.
Bank Securitization Vehicles
Periodically, we sell loans to off-balance sheet entities or trusts, either
for
capital management purposes or to obtain alternate sources of
funding. Gains on sales to the securitization vehicles, as well as revenues
paid to us for servicing the loans sold, are recognized in income.
BMO has retained interests in our three bank securitization vehi-
cles, as we are sometimes required to purchase subordinated interests
or maintain cash deposits in the entities, and we have also recorded
deferred purchase price amounts. These latter amounts represent gains
on sales to securitization vehicles that have not been received in
cash. Retained interests recorded as assets in our Consolidated Balance
Sheet as at October 31, 2008 and 2007 were $882 million and $388 mil-
lion, respectively. In the event there are defaults on the assets held
by the vehicles, retained interests may not be recoverable and would
then be written down. In addition, prepayments and changes in interest
rates will impact the expected cash flows from the vehicles, which
may result in write-downs of retained interests. During the year ended
October 31, 2008, there was a $5 million write-down of retained inter-
ests in bank securitization vehicles ($27 million of write-downs in 2007).