TD Bank 2006 Annual Report Download - page 58

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis
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Residential Mortgage Loans
The Bank securitizes residential mortgages through the creation
of mortgage-backed securities (MBS) and the eventual transfer
to VIEs. The Bank continues to service the securitized mortgages
and may be exposed to the risks of the transferred loans through
retained interests. There are no expected credit losses on the
retained interests of the securitized residential mortgages as they
are all government guaranteed. We retain interests in the excess
spread on the sold MBS and continue to service the mortgages
underlying these MBS for which we receive benefits, equivalent
to market-based compensation.
As at October 31, 2006, the Bank had outstanding securitized
residential mortgages of $17.9 billion as compared with $15.5
billion in fiscal 2005. The carrying value of our retained interests
in securitized residential mortgage loans at October 31, 2006,
was $128.4 million compared to $273 million in 2005.
Co-ownership Structures
The Bank securitizes real estate secured personal loans, credit
card loans and commercial mortgages through a co-ownership
structure. Through this structure, ownership interests in a
homogenous pool are sold to SPEs. The ownership interest
entitles the SPE to a portion of the loan collections used to pay
its expenses and obligations to the holders of its asset-backed
securities. Although the Bank’s interests in the receivables are
no longer on our balance sheet, we maintain the client account
and retain the relationship. The securitization of our real estate
secured personal loans and credit card receivables is a sale from
alegal perspective and qualifies for sale treatment from an
accounting perspective. At the time of sale these receivables
are removed from our balance sheet resulting in a gain or loss
reported in non-interest income on the Consolidated Statement
of Income.
For the securitization of real estate secured personal loans the
Bank provides credit enhancement through its retained interest
in the excess spread of the QSPE and in some cases by providing
letters of credit. The Bank’s interest in the excess spread of the
QSPEs and the letters of credit is subordinate to obligations of
the holders of the asset-backed securities and absorbs losses
with respect to the real estate personal loans before payments to
noteholders are affected. As at October 31, 2006, the Bank had
outstanding securitized real estate personal loans of $8 billion as
compared with $4.8 billion as at October 31, 2005. The carrying
value of our retained interests in securitized real estate personal
loans at October 31, 2006, was $61.7 million, compared with
$32 million as at October 31, 2005.
For credit card securitizations the Bank provides credit
enhancement to the QSPE through its retained interests in the
excess spread. The Bank’sinterest in the excess spread of the
QSPE is subordinate to the QSPE’s obligations to the holders of
its asset-backed securities and absorbs losses with respect to
the credit card loans before payments to the noteholders are
affected. If the net cash flows are insufficient, the Bank’s loss is
limited to an interest-only strip that arises from the calculation
of the gain or loss at the time receivables are sold. As at October
31, 2006, the Bank had outstanding securitized credit card
receivables of $800 million as compared with $1.3 billion as at
October 31, 2005. The carrying value of our retained interests
in securitized credit card receivables at October 31, 2006,
was $7.03 million, compared with $24 million as at
October 31, 2005.
The Bank sells commercial mortgages in collateral pools, to
aSPE. The SPE finances the purchase of these pools by way
of issuing ownership certificates that carry varying degrees of
subordination and which, when rated, range from AAA to B-,
and unrated. The ownership certificates represent undivided
interests in the collateral pool, and the SPE, having sold all
undivided interests available in the pool, retains none of the risk
of the collateral pools. The sale of our commercial mortgages
to the SPE constitutes an accounting sale and since we neither
control the SPE nor carry any residual risks/returns in the
mortgages, we do not consolidate the SPE.
The Bank also securitizes commercial mortgages through sales
to VIEs. As at October 31, 2006, $165 million of our originated
commercial mortgages had been securitized through a VIE
sponsored by us, while $55 million of commercial mortgages
had been sold to a third-party sponsored VIE. The Bank’s interest
in the excess spread, cash collateral account, and the commercial
mortgages of the VIE sponsored by us is subordinate to the VIE’s
obligations to the holders of its asset-backed securities. The
Bank’sinterest in the excess spread of the third-party sponsored
VIE is subordinate to the VIE’s obligations to the holders of its
asset-backed securities.
Total bank-originated securitized assets not included on the
Consolidated Balance Sheet amounted to $27.9 billion, com-
pared with $23.9 billion a year ago. Further details are provided
in Note 4 to the Bank’s Consolidated Financial Statements. If
these securitizations were to be terminated, the Bank would
experience capital implications of maintaining the assets on
the Consolidated Balance Sheet and be exposed to the assets’
full operational, financial and market risks.
CAPITAL TRUSTS
We sponsor SPEs to raise capital, including TD Capital Trust II
Securities -Series 2012-1 (TD CaTS II) issued by TD Capital Trust
II (Trust II), which is a VIE. As the Bank is not the primary benefi-
ciary of Trust II, the Bank does not consolidate it for accounting
purposes. For further details on this capital trust activity and the
terms of TD CaTS II issued and outstanding, see Note 12 to the
Consolidated Financial Statements.
SECURITIZATION OF THIRD PARTY-ORIGINATED ASSETS
The Bank assists its clients in securitizing their financial assets
through SPEs administered by the Bank. The Bank may provide
credit enhancement, swap facilities or liquidity facilities to the
resulting SPEs as well as securities distribution services. Liquidity
facilities are only available in the event of a general market
disruption and the probability of loss is negligible. The Bank does
not provide employees to the SPEs, nor does it have ownership
interests in these SPEs and all fees earned in respect of these
activities are on a market basis. If these securitizations were
to be terminated, the Bank would experience a reduction in
securitization income.