Mortgage Broker

CMB MAGAZINE cmba-achc.ca winter 2016 | 39 unitranchemortgages The essence e highest-ranking lenders in a unitranche mortgage are referred to as senior lenders; they have priority in being paid out. Because of their priority payout, they generally receive a lesser portion of the financial return on the mortgage. Pension funds, insurance companies, and other relatively low-risk-takers could be attracted to be senior lenders. Lenders who, in being paid out, are in tranches that come aer the senior lenders are known as junior lenders. In this position they have a greater risk of not being paid out and accordingly generally attract a higher portion of the financial return on the mortgage. Hedge funds and others willing to take a higher risk for a higher return could be attracted to be junior lenders. Whatever agreements are reached between the lenders, the entitlements of course cannot exceed the total obligations of the borrower under the mortgage. Timing of creating tranches Whether a mortgage is a unitranche mortgage before or aer funding has no bearing on the borrower; a mortgage can become a unitranche mortgage at any time. e initial lenders (or lender) can negotiate and fund the mortgage to the borrower. ey can then sell investment in the tranches to further lenders in accordance with any agreements they reach. Subsequent lenders can be, in accordance with agreements then in place, brought in with further agreements. Alternatively, the tranches can be created prior to the mortgage being funded to the borrower. In advance of the funding: the tranches are created, each investor contributes to the pool of funds in accordance with their holding, and the mortgage is funded to the borrower. Circumstances will dictate at which stage of the process tranches are created. For example, creating the tranches before funding of the mortgage may allow faster and easier closing of the transaction, but the initial lender may be required to alone fund the entire mortgage. On the other hand, creating the tranches before the funding of the mortgage may relieve the initial lender from alone funding the entire mortgage, but it may slow down the closing of the transaction. Example of a unitranche mortgage 1 An initial lender funds a $10 million mortgage at an effective rate of six per cent interest per annum. 2 Aer funding the mortgage, the lender creates three tranches having the following main differences: 1) Tranche A – gets paid out first and receives 4/16 of the total financial return generated by the mortgage 2) Tranche B – gets paid out second and receives 5/16 of the total financial return generated by the mortgage 3) Tranche C – gets paid out third and receives 7/16 of the total financial return generated by the mortgage 3 e initial lender sells interests in each tranche to various further lenders. e further lenders could buy interests in more than one of the tranches. Each tranche could have many lenders or a single lender. 4 Lenders in the same tranche would share the benefits and detriments of the tranche, in accordance with his or her proportionate holding in the tranche. 5 Lenders with higher payout priority would get paid out first and those with lower payout priority would face the greater risk of any payout shortfalls. e arrangements which are possible are infinitely varied. Perhaps Tranche A enjoys priority only until it receives the amount of its investment back. Perhaps the financial return to be received by each tranche is different. Perhaps the initial lender is to receive a greater benefit because of the time and effort put into arranging the initial loan and the creation of the unitranche mortgage. What's consistent however is that the arrangements are made between the lenders; they do not involve the borrower who negotiates a single loan secured by a single mortgage. Some considerations A unitranche mortgage can be completed with greater certainty, less delay and lower cost than having each of the lenders negotiate and fund their own separate mortgage with the same borrower. However, this may come at the price of shiing the complexity of accommodating the differing interests of various lenders from the borrower to the various lenders. Rather than the borrower having to negotiate the complex relationships between various lenders, the lenders must do so between themselves. e increased complexity for lenders can make the investment less attractive for less sophisticated lenders, but more attractive for less sophisticated borrowers. Perhaps over time the process will gain some normalcy, familiar procedures, and familiar forms. Will unitranche mortgages catch on in Canada? Wait and see, but be prepared. Circumstances will dictate at which stage of the process tranches are created.

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