FEDERAL REG

SOR/2016-9: Eligible Mortgage Loan Regulations — Regulations Amending Protection of Residential Mortgage or Hypothecary Insurance Act

REGISTRATION OF FEDERAL REGULATION - VIA PART II OF THE GAZETTE

Registered
February 4, 2016


REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the regulations.) Issues These Regulations (i) prohibit the use of taxpayer-backed insured mortgages as collateral in securitization vehicles that are not sponsored by Canada Mortgage and Housing Corporation (CMHC); (ii) restore taxpayer-backed portfolio insurance to its original purpose of supporting access to funding for mortga... (Click for more)


Published on February 4, 2016

Bill Summary

SOR/2016-9: Eligible Mortgage Loan Regulations — Regulations Amending Protection of Residential Mortgage or Hypothecary Insurance Act

REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the regulations.) Issues These Regulations (i) prohibit the use of taxpayer-backed insured mortgages as collateral in securitization vehicles that are not sponsored by Canada Mortgage and Housing Corporation (CMHC); (ii) restore taxpayer-backed portfolio insurance to its original purpose of supporting access to funding for mortgage assets; and, (iii) increase the minimum down payment requirement for government-backed mortgage insurance for properties over $500,000. These changes relate to the Eligible Mortgage Loan Regulations, made pursuant to the Protection of Residential Mortgage or Hypothecary Insurance Act, which apply to the private mortgage insurers, and the Insurable Housing Loan Regulations, made pursuant to the National Housing Act, which apply to CMHC. These measures are intended to increase market discipline in residential lending, contain risks in the housing market, and reduce taxpayer exposure to the housing sector, contributing to maintaining a healthy, competitive, and stable housing market. Mortgage insurance can be used to insure (1) high loan-to-value mortgage loans (i.e. loan-to-value greater than 80%); or (2) low loan-to-value mortgage loans (i.e. loan-to-value of 80% or less). Federally regulated lenders are required by legislation to insure high loan-to-value mortgage loans. For a variety of reasons, some lenders also choose to insure low loan-to-value mortgage loans. Low loan-to-value insurance is a mortgage insurance product lenders use to insure individual mortgages at origination, or a pool of mortgages at some point after the mortgages have been extended to the borrowers. The original policy intent of government-backed portfolio insurance was to enable lenders to access funding for low ratio mortgages through CMHC securitization programs for which government-backed mortgage insurance is obligatory. The Government backs 100% of mortgage insurance obligations of CMHC, in the event that it is unable to make insurance payouts to lenders. In order for private mortgage insurers to compete with CMHC, the Government backs private mortgage insurers’ obligations to lenders (in the event that a private insurer is unable to make insurance payouts to lenders), subject to a deductible charged to the lender equal to 10% of the original principal loan amount. The Government guarantee of mortgage insurance is intended to support access to homeownership for creditworthy buyers and promote stability in the housing market, financial system and economy. As part of its role to promote stability, and to protect taxpayers from potential mortgage loan losses, the Government sets the eligibility rules for government-backed insured mortgages. In the wake of the global financial crisis, lenders increased their use of insured mortgages in private securitization vehicles (e.g. asset-backed commercial paper). At the same time, some federally regulated lenders began insuring large volumes of mortgages using portfolio insurance and retaining these insured mortgages on their balance sheets. Portfolio insurance allowed these lenders to benefit from lower regulatory capital requirements than if the mortgages were not insured. Higher homeowner equity plays a key role in strengthening the resiliency of homeowners and maintaining a stable and secure housing market. Changes to the rules for government-backed mortgage insurance will increase the minimum down payment for new insured mortgages from 5% to 10% for the portion of a house’s price above $500,000, representing a graduated approach to increasing the down payment requirement proportionally to the cost of a home. This protects the stability of the housing market and the economy as a whole, as well as the interests of taxpayers who ultimately back government-guaranteed mortgage insurance. Objectives Prohibit the use of taxpayer-backed insured mortgages as collateral in securitization vehicles that are not sponsored by CMHC. Restore lender use of government-backed portfolio insurance to its original purpose — funding through CMHC securitization programs. Provide a transition for affected lenders to adjust to these measures in a gradual and orderly way. Change the eligibility rules for new government-backed insured mortgages, affecting new purchases of insured properties priced above $500,000. Effective February 15, 2016, the minimum down payment for new insured mortgages will be increased from 5% to 10% for the portion of the house price above $500,000. Description 1) New insurability criteria stipulate that government-backed insured mortgages (both high and low loan-to-value) cannot be in a pool of loans on the direct basis of which marketable securities that are not guaranteed by CMHC have been issued, subject to the transition provisions below. 2) The transition provisions permit existing pools of loans on the basis of which securities continue to be issued after June 30, 2016, to continue to include government-backed insured mortgages. After December 31, 2021, no insured mortgages can be in a pool of loans on the direct basis of which marketable securities that are not guaranteed by CMHC have been issued. 3) If no new marketable securities have been issued on the direct basis of a pool of loans after June 30, 2016, insured mortgages can remain in the pool (e.g. legacy covered bonds). 4) New insurability criteria require that, effective July 1, 2016, low loan-to-value portfolio-insured mortgages must be securitized via the National Housing Act Mortgage-Backed Securities Program within six months of being insured. This requirement also applies to portfolio-insured mortgages released upon the maturity of the National Housing Act Mortgage-Backed Security. 5) Exceptions provide that portfolio-insured loans can remain insured where a. The loan is no longer eligible for the National Housing Act Mortgage-Backed Securities Program as a result of having fallen into arrears while insured. b. As long as a minimum of 95% of a lender’s low loan-to-value portfolio-insured loans with an insurer meet the criteria under item 4) or 5)a. above, then portfolio insurance coverage may continue to be provided for up to a maximum of 5% of a lender’s low loan-to-value portfolio-insured mortgages with that insurer, even if the criteria under item 4) or 5)a. is not met for those loans. 6) Low loan-to-value portfolio-insured mortgage loans for which an insurance application has been received prior to the coming-into-force date and low loan-to-value mortgage loans that are insured on an individual (transactional) basis will not be required to be securitized via the National Housing Act Mortgage-Backed Securities Program. However, consistent with criteria under item 1), these loans cannot be part of a pool of loans on the direct basis of which marketable securities are issued that are not guaranteed by CMHC, unless they fall into the transition provisions. 7) New insurability criteria maintain the current 5% minimum down payment requirement for the first $500,000 of a house’s price, while requiring a 10% minimum down payment for the portion of the house price in excess of $500,000. Therefore, the minimum down payment for an insured high loan-to-value ratio mortgage will increase only gradually with the price of a house, varying from 5% for homes priced at or below $500,000 to 7.5% for houses priced just below $1 million. 8) The higher minimum down payment for properties over $500,000 will be effective February 15, 2016. For those mortgage loans for which an insurance application has been received between the announcement of this amendment on December 11, 2015, and February 14, 2016, the new insurability criteria will not apply provided that the mortgage loan is funded no later than July 1, 2016. This exception is further extended for these loans in the event of unforeseen circumstances beyond the borrower’s control that delay funding, provided that the mortgage is initially intended to be funded no later than July 1, 2016, and is funded no later than December 31, 2016. “One-for-One” Rule The “One-for-One” Rule does not apply to this proposal, as there is no change in administrative costs to business. Small business lens The small business lens does not apply to this proposal, as there are no costs to small business. Consultation The Government solicited views from residential mortgage lenders and mortgage insurers in 2013, 2014, and 2015 on measures to (i) prohibit the use of taxpayer-backed insured mortgages as collateral in securitization vehicles that are not sponsored by CMHC; and, (ii) restore taxpayer-backed portfolio insurance to its original purpose of supporting access to funding for mortgage assets. The Regulations take into account stakeholders feedback, as appropriate, including with respect to more flexible transition provisions and some technical adjustments. A stakeholder proposal to exempt high loan-to-value insured mortgages from the prohibition on the use of insured mortgages in non-CMHC securitization vehicles was not addressed. An assessment of the proposal concluded that an adjustment of this nature could undermine the policy intent of increasing market discipline in residential lending and reducing taxpayer exposure to the housing sector. The Regulations related to portfolio insurance incorporate a number of technical adjustments, providing operational flexibility as requested by stakeholders. These include a number of provisions outlined above, i.e. with respect to low loan-to-value insured mortgages that fall into arrears, are insured on a transactional basis, or do not conform with National Housing Act Mortgage-Backed Securities Program requirements. The Regulations require that portfolio insurance be cancelled if the underlying insured mortgage assets do not continue to be used in a National Housing Act Mortgage-Backed Security (e.g. after the maturity of the security). The Government had considered requiring a term limit of five years on portfolio insurance pools, but this was not addressed based on stakeholders feedback that no portfolio insurance term restrictions would provide greater operational flexibility. Regulations to increase the minimum down payment requirement for government-backed mortgage insurance for properties over $500,000 were exempted from prepublication. The Minister of Finance has consulted with the Governor of the Bank of Canada and the Superintendent of Financial Institutions as required by subsection 42(1) of the Protection of Residential Mortgage or Hypothecary Insurance Act, and subsection 8.1(1) of the National Housing Act. Rationale The prohibition on the use of insured mortgages outside of CMHC securitization programs will limit the use of government-backed insured mortgages, increasing market discipline in residential lending by encouraging the development of fully private funding options for conventional mortgages and reducing taxpayer exposure. The portfolio insurance purpose test will restore taxpayer-backed portfolio insurance to its original purpose — i.e. funding via CMHC securitization programs. This measure does not restrict the availability of portfolio insurance for those financial institutions that continue to access it for funding purposes through CMHC securitization. Higher homeowner equity plays a key role in maintaining a stable and secure housing market. Amending the down payment eligibility criteria is part of a coordinated federal set of actions announced on December 11, 2015, intended to address emerging vulnerabilities in certain regional housing markets, while not overburdening other regions. These actions rebalance Government support for the housing sector to promote long-term stability and balanced economic growth. Implementation, enforcement, and service standards The proposed Regulations would not require any new mechanisms to ensure compliance and enforcement. As the prudential regulator of federally regulated financial institutions, the Office of the Superintendent of Financial Institutions (OSFI) oversees private mortgage insurers’ compliance with the Eligible Mortgage Loan Regulations (made pursuant to the Protection of Residential Mortgage or Hypothecary Insurance Act). OSFI would use its existing compliance tools that may include compliance agreements and administrative monetary penalties with regard to private mortgage insurers. CMHC reports to Parliament through the Minister of Families, Children and Social Development and is subject to the accountability framework for Crown corporations. Under the National Housing Act, the Superintendent of Financial Institutions is required to undertake examinations or inquiries to determine if CMHC’s commercial activities are being conducted in a safe and sound manner, with due regard to its exposure to loss. The Superintendent must also report the results of any examinations or inquiries to the Government. Contact Wayne Foster Director Capital Markets Division Department of Finance Canada 90 Elgin Street, 13th Floor Ottawa, Ontario Telephone: 613-369-3968 Fax: 613-369-3894 Email: f[email protected]canada.ca Footnote a S.C. 2011, c. 15, s. 20 Footnote 1 SOR/2012-281

This Bill does not amend any statutes.

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