Mortgage Insurance Criteria

Criteria for mortgage insurance

Mortgage insurance law updates There are two things about the regulations that have been put forward. First, for each of the high-yield mortgage mortgages (those with a loan-to-value of more than 80%) and low-yield mortgage mortgages (those with a loan-to-value of less than 80%), they set a new admission criteria to be eligible for a mortgage insurance policy, and second, they require 'transitional provisions' to meet the new criteria.

As regards high rate exposures, the proposal requires that if a high rate exposure is'part of a pools of exposures on the base of which transferable securities were originated after 15 December 2015,[then] all transferable securities originated on the base of the pools must be secured in accordance with sub-section 14(1) of the NHA'[6].

Effectiveness of the new criteria is to make sure that high-yield secured mortgage credits, if securitised, are financed through CMHC securitisation programmes - namely the NHA MBS Programme or the Canada Mortgage Bond Programme - whose bonds are backed by CMHC and supported by the Government of Canada.

This change mirrors the Federal Government's policies that the use of tax-backed secured mortgage as security is restricted to securitisation vehicle financed by CMHC. While low-yield exposures pose a lower credit loss exposure, the proposals provide that low-yield, portfoliocovered mortgage exposures "shall be part of a loan pools on the bases of which security issues have been made that are secured under ยง 14 (1) NG".

A number of derogations are provided for in the proposal, among them the "six-month rule". If a mortgage has been taken out in the last six moths for at least one single borrower per annum, or if the borrower has not taken out insurance for the mortgage, the first exemption applies. These exemptions apply to credits that have been approved at the due date of a bond secured by the NHA or if the credit is not covered by insurance.

Further exemptions include mortgage lending that was not part of such a fund because it was in default, and the " Legacy covered bonds exemption ", which allows new secured credits to be added to funds if no new collateral is provided for these funds after 31 December 2015.

In addition, the proposal provides that the new admission criteria for low-rate lending will not cover individually covered lending. Another exemption for low-rate mortgages is foreseen if (a) 97% of the low-rate mortgages covered by the insurance (with the exclusion of those covered on an individually basis) otherwise fall within one of the required exemptions, or (b) are exempted from fulfilling the new criteria, (i) because the low-rate mortgages were not in a pools of mortgages on the bases of which collateral was provided, if the mortgage insurance coverage for the mortgage was obtained by the mortgage insurance company before 1 January 2016, or (ii) under the transition rules for the mortgage insurance required by the proposal.

This exemption effect allows a creditor, pending compliance with the other conditions, to retain 3% cover on its low interest mortgage credit without the need for such credit to be included in a CMHC-financed securitisation or otherwise covered by any of the exemptions. Finally, with regard to low-rate mortgages, it is important that RIAS has explicitly declared that non-compliance with the six-month rules would force a mortgage insurance company to terminate the corresponding mortgage insurance.

Adherence to the proposal is governed by the "transitional provisions", which are intended to allow the creditors concerned to adapt to the new arrangements within certain deadlines and on the grounds of the amount of their mortgage pools covered as at 30 June 2015. From 1 January 2016 to 31 December 2017, the new criteria for admission shall not be applied to a credit that is part of a credit pool underlying the issue of transferable securities before 1 January 2016 if the aggregate amount of all secured credits in that credit pool does not equal or fall short of the aggregate amount of all secured credits that were part of that credit pool on 30 June 2015.

From 1 January 2018 to 31 December 2020, the new admission criteria shall not be applicable to a credit that is part of a credit pool based on which transferable securities originated before 1 January 2016, provided that the aggregate amount of all secured credits in that credit pool does not equal 50% of the aggregate amount of all secured credits that were part of the credit pool on 30 June 2015.

Prospective investors are welcome to contact the Ministry of Finance by 6 July 2015 to find out more about the suggested regulations. The present legislative updating is on the basis of the Ministry of Finance's proposal for a regulation as set out in the Canada Gazette, Vol. 149, No. 23, pp. 43-51.

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