Legal Update Regarding Mortgage Insurance
- Canada’s regulatory and supervisory framework of its residential mortgage market has undergone significant change in the aftermath of the financial crisis
- The most recent and long-awaited changes to the regulatory framework were released on June 6, 2015, when the Finance Department published amendments to two sets of regulations governing the role of mortgage loan insurance in Canada
- The “Regulations Amending the Insurable Housing Loan Regulations” (the “CMHC Regulations”) and the “Regulations Amending the Eligible Loan Regulations” (the “Approved Insurer Regulations” and, together with the CMHC Regulations, the “Proposed Regulations”), represent the Federal Government’s legislative response to its stated policy initiatives regarding the prudent use of mortgage insurance that were first outlined in Canada’s Economic Action Plan released in March 2013 and subsequently restated in each of the 2014 and 2015 federal budgets
- The Proposed Regulations replace earlier proposals published by the Finance Department in August, 2014, and are scheduled to come into force on January 1, 2016
- The Regulatory Impact Analysis Statement (“RIAS”) prepared in respect of the amendments listed three objectives:
- Prohibit the use of taxpayer-backed insured mortgages as collateral in securitization vehicles that are not sponsored by the Canada Housing and Mortgage Corporation (“CMHC”)
- Restore lender use of government-backed portfolio insurance to its original purpose – the funding of Canadian housing loans through CMHC securitization programs
- Providing a transitional period for affected mortgage lenders to adjust to the Proposed Regulations
- Pursuant to the National Housing Act (Canada)(the “NHA”), the federal Minister of Finance is given statutory authority to specify the terms or conditions relating to the guarantee of payments under securities that are issued on the basis of Canadian housing loans, including the passing of regulations establishing criteria that must be met in order for mortgage insurers to provide mortgage insurance against risk
- The CMHC Regulations will apply to mortgage insurance provided by CMHC and the Approved Insurer Regulations will apply to mortgage insurance provided by “approved mortgage insurers” pursuant to the Protection of Residential Mortgage or Hypothecary Insurance Act (Canada)
- CMHC and the “approved mortgage insurers” may only insure “eligible mortgage loan” risk, the criteria for eligible loans are prescribed in the Insurable Housing Loan Regulations and the Eligible Mortgage Loan Regulations, respectively – and it is this criteria that is being amended and supplemented by the Proposed Regulations
The Proposed Regulations do two things. Firstly, they establish a new eligibility criterion for each of high ratio mortgage loans (those with loan to value ratios of greater than 80%) and low ratio mortgage loans (those with loan to value ratios of equal to or less than 80%) to qualify for mortgage loan insurance, and secondly, they prescribe “transitional provisions” for compliance with the new criteria.
High Ratio Loans
With respect to high ratio loans, the Proposed Regulations require that if a high ratio loan “is part of a pool of loans on the basis of which securities have been issued after December 15, 2015, [then] all securities issued on the basis of the pool must be guaranteed under subsection 14(1) of the NHA”. The impact of the new criterion is to ensure that high ratio insured mortgage loans, if securitized, will be funded through CMHC securitization programs – namely the NHA MBS program or the Canada Mortgage Bond program – which securities are guaranteed by CMHC and backed by the Government of Canada. The amendment reflects the Federal Government’s policy that the use of taxpayer-backed insured mortgages as collateral be limited to securitization vehicles that are sponsored by CMHC.
Low Ratio Loans
Although low ratio loans represent less risk of default, the Proposed Regulations stipulate that low ratio portfolio insured mortgage loans “must be part of a pool of loans on the basis of which securities that are guaranteed under subsection 14(1) of the NHA have been issued”. The Proposed Regulations do provide for several exceptions, including the “six-month rule”. The first exception is applicable if a mortgage loan was included in such a pool of loans for at least one day in the previous six months or if the loan was not insured. This exception is intended to address loans that have been released upon the maturity of a NHA-backed security or if the loan is not insured. Other exceptions apply to mortgage loans that were not part of such a pool because they had fallen into arrears and the “legacy covered bond exception” which allows new insured loans to be added to pools if no new securities in respect of such pools have been issued after December 31, 2015. The Proposed Regulations also specify that the new eligibility criterion for low ratio loans does not apply to loans that are insured on an individual basis.
A further exception for low ratio loans is stipulated where (a) 97% of a lender’s insured low ratio loans (excluding loans insured on an individual basis) otherwise fit into one of the prescribed exceptions, or (b) are exempt from having to satisfy the new criteria (i) because the low ratio loan was not in a pool of loans on the basis of which securities have been issued if the application of mortgage insurance in respect of the loan was received by the mortgage insurer prior to January 1, 2016, or (ii) due to the transitional provisions prescribed in the Proposed Regulations. The effect of this exception permits a lender, subject to meeting the other requirements, to maintain portfolio insurance coverage of 3% of its low ratio mortgage loans without having to include such loans in a CMHC sponsored securitization or otherwise fall into one of the prescribed exceptions.
As a final point regarding low ratio loans, it is significant that the RIAS specifically stated that a failure to comply with the six month rule would result in a mortgage insurer being required to cancel the applicable mortgage insurance.
Compliance with the Proposed Regulations is subject to the “transitional provisions” which are designed to allow affected lenders to adjust to the new measures within certain prescribed time periods and based on the size of its insured mortgage pool determined on June 30, 2015.
During the period from January 1, 2016 to December 31, 2017, the new eligibility criteria do not apply to a loan that is part of a pool of loans on the basis of which securities were issued prior to January 1, 2016 if the total amount of all insured loans in that pool does not exceed the total amount of all insured loans that were part of that pool on June 30, 2015.
During the period from January 1, 2018 to December 31, 2020, the new eligibility criteria do not apply to a loan that is part of a pool of loans on the basis of which securities were issued prior to January 1, 2016 if the total amount of all insured loans in that pool does not exceed 50% of the total amount of all insured loans that were part of the pool on June 30, 2015.
The transitional provisions do not provide for relief for the period after December 31, 2020.
Interested persons are invited to make representations concerning the Proposed Regulations to the Department of Finance by July 6, 2015. All representations must cite the Canada Gazette, Part I, the date of publication (June 6, 2015) and are to be addressed to Wayne Foster, Director, Capital Markets Division, Department of Finance, 90 Elgin Street, 13th Floor, Ottawa Ontario K1A 1G5, email: [email protected].This legal update is based on the proposed regulations of the Department of Finance as published in the Canada Gazette, Vol. 149, No. 23, pp.43-51.
 R.S.C. 1985, c. N-11.
 R.S.C. 1985, c. N-11, subsection 8.1(1) and subsection 14(1)
 S.C. 2011, c.15.
 Subsection 14(1) of the NHA provides: “The Corporation [CMHC] may — with the Minister of Finance’s approval and any terms or conditions that are specified by him or her — guarantee payment of any or all of the principal or interest, or both, in respect of securities issued on the basis of housing loans. The terms and conditions may, among others, relate to the amount and price of the guarantee, the characteristics of the securities to be guaranteed and the manner in which the securities are to be issued.”