Timely payment cover (TPC) is a mechanism that is used to protect investors in a securitisation from losses in the event that borrowers do not make their mortgage payments on time.
TPC is typically structured as a reserve fund that is held by the issuer of the securitisation. The reserve fund is funded by a portion of the interest payments that are received from the borrowers. If a borrower does not make a mortgage payment on time, the issuer can draw on the reserve fund to make the payment on behalf of the borrower. This ensures that the investors in the securitisation continue to receive their payments, even if some of the borrowers default on their mortgages.
TPC is a common feature of Australian residential mortgage-backed securities (RMBS). The TPC for an RMBS is typically set at a level that is equal to 3% of the outstanding mortgage debt. This means that the issuer of the RMBS will have enough money in the reserve fund to cover 3% of the mortgage payments that are not made on time.
Here are some of the applications of TPC in securitisation:
- To protect investors: TPC protects investors in a securitisation from losses in the event that borrowers do not make their mortgage payments on time.
- To manage credit risk: TPC can be used to manage credit risk. For example, an issuer may set the TPC at a higher level if the underlying mortgages have a higher credit risk. This will help to protect the securitisation from losses if a large number of borrowers default on their mortgages.
- To create new products: TPC can be used to create new securitization products that meet the needs of different investors. For example, an issuer may issue a securitization with a TPC that is designed to appeal to investors who are looking for a predictable stream of income.
It is important to note that TPC is not without risk. If the reserve fund is not large enough to cover all of the mortgage payments that are not made on time, the investors in the securitisation may suffer losses.
Timely payment cover is sometimes referred to as "on-time payment cover" or "default cover".