Vol. 149, No. 11 — June 3, 2015
SOR/2015-108 May 15, 2015
PROTECTION OF RESIDENTIAL MORTGAGE OR HYPOTHECARY INSURANCE ACT
Regulations Amending the Protection of Residential Mortgage or Hypothecary Insurance Regulations
P.C. 2015-588 May 14, 2015
His Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to paragraph 41(a) of the Protection of Residential Mortgage or Hypothecary Insurance Act (see footnote a), makes the annexed Regulations Amending the Protection of Residential Mortgage or Hypothecary Insurance Regulations.
REGULATIONS AMENDING THE PROTECTION OF RESIDENTIAL MORTGAGE OR HYPOTHECARY INSURANCE REGULATIONS
1. The Protection of Residential Mortgage or Hypothecary Insurance Regulations (see footnote 1) are amended by adding the following after section 4:
CONDITIONS ON APPROVED MORTGAGE INSURERS
Restriction — substitution
4.1 (1) An approved mortgage insurer must not replace an insured mortgage or hypothecary loan with another mortgage or hypothecary loan under the same insurance coverage unless
- (a) both loans are made to the same borrower and the purpose of the new loan is to discharge the outstanding balance of the loan being replaced; or
- (b) the new loan is made in relation to a loan workout whose purpose is to reduce or avoid losses on a real or potential mortgage or hypothecary insurance claim in respect of the outstanding loan being replaced.
Restriction — portfolio insurance
(2) An approved mortgage insurer that makes a commitment to insure a portfolio of mortgage or hypothecary loans up to a specified total value must not insure a mortgage or hypothecary loan in accordance with that commitment later than one year after the day on which the commitment is made.
2. The Regulations are amended by adding the following after section 10:
Existing portfolio commitment
10.1 (1) Subsection 4.1(1) does not apply in respect of insurance coverage resulting from a commitment to insure a portfolio of mortgage or hypothecary loans up to a specified total value that is made before that subsection comes into force.
Existing portfolio commitment
(2) Subsection 4.1(2) does not apply in respect of a commitment that is made before that subsection comes into force.
COMING INTO FORCE
3. These Regulations come into force on the day on which they are registered.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the regulations.)
The Government backs mortgage insurance, including portfolio insurance, provided by Canada Mortgage and Housing Corporation (CMHC) and from private mortgage insurers (i.e. Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company). CMHC is an agent Crown corporation, and therefore the Government stands behind 100% of its obligations. The Government also backs private mortgage insurers’ obligations to lenders subject to a 10% deductible. That is, in the unlikely event of a private mortgage insurer’s winding-up, the Government would honour lender claims for insured mortgages in default, subject to (1) any proceeds the beneficiary has received from the underlying property or the insurer’s liquidation; and (2) a deductible of 10% of the original principal amount of the insured mortgage.
Mortgage insurance can be used to insure (1) high-ratio mortgage loans (i.e. loan-to-value [LTV] greater than 80%); or (2) low-ratio mortgage loans (i.e. LTV of 80% or less). Unlike insurance on high-ratio mortgage loans, which is required for federally- regulated and most provincially-regulated lenders, the insurance of low-ratio mortgage loans is optional. There are two types of low-ratio mortgage insurance. Low-ratio transactional insurance is provided on an individual mortgage at the point of origination, similar to industry practice for high-ratio mortgage insurance. Low-ratio portfolio insurance is a mortgage insurance product lenders use to insure a pool of mortgages which are not necessarily insured at origination (i.e. can be insured at some point after they have been funded).
Portfolio insurance has a substitution feature that allows mortgage lenders to replace mortgage loans that drop out of a portfolio insurance pool (i.e. mortgage loans that are transferred to another lender or paid out in full) with similar loans, without paying additional premiums. This practice was introduced by mortgage insurers to increase demand for the portfolio insurance product. The insured pool continues to be subject to the original portfolio insurance policy amount (i.e. it cannot increase due to the substitution of new mortgage loans into the insured pool) for the life of the policy. In addition, some portfolio insurance products allow additional loans to be added, up to a specified value, over time, even if no loans drop out.
These features increase and prolong taxpayer exposure to government-backed portfolio insurance by permitting lenders to increase or maintain the outstanding amount of portfolio-insured mortgage pools for an extended period of time at little or no cost to the lender. This practice reduces market discipline in residential mortgage lending by lowering the cost of insuring additional loans in the portfolio insurance pool. This feature has contributed to the growth in demand for this product, increasing taxpayer exposure to government-backed portfolio insurance, and serves no public policy purpose.
The Economic Action Plan 2015 announced that the Government will limit the extension of portfolio insurance through the substitution of mortgages in insured pools.
- To increase market discipline in residential lending and reduce taxpayer exposure to the housing sector.
The Protection of Residential Mortgage or Hypothecary Insurance Regulations and the Housing Loan (Insurance, Guarantee and Protection) Regulations (collectively referenced as the regulations) have each been amended to provide the following:
- (1) prohibit substitution, (i.e. replacing an insured mortgage loan with another mortgage loan under existing insurance coverage) except where
- (a) a new mortgage loan is made to the same borrower for the purpose of discharging the outstanding balance of a prior mortgage loan, as long as it continues to be insured under existing insurance coverage;
- (b) a new loan is made to a borrower to modify the terms of an existing loan (i.e. loan workout) in order to reduce or avoid losses on a real or potential mortgage insurance claim;
- (2) mortgage insurers that commit to insure a pool of mortgage loans are prohibited from adding mortgage loans more than one year after the commitment is made; and
- (3) a grandfathering clause excludes portfolio insurance coverage that was entered into before the coming into force of the amendments.
The “One-for-One” Rule does not apply, as there is no change in administrative costs to business.
Small business lens
The small business lens does not apply, as there are no costs to small business.
Industry stakeholders, including CMHC, the private mortgage insurers and mortgage lenders were consulted on this measure in the fall of 2013. Feedback indicated that industry stakeholders were not opposed to the elimination of the portfolio insurance substitution feature.
The amendments prohibit mortgage insurers from offering the substitution feature as part of the portfolio insurance product, with limited exceptions. It also prohibits mortgage insurers that commit to insuring a portfolio of loans up to a specified total value from adding loans to the portfolio beyond one year. This will reduce taxpayer exposure to government-backed portfolio insurance as portfolio-insured mortgage loans will be permitted to fall out of the pools (e.g. when a borrower switches to a new lender or when a mortgage loan is prepaid), reducing the outstanding amount more quickly over time. It will also increase market discipline in residential lending as lenders will be required to pay to insure each mortgage loan.
Implementation, enforcement and service standards
The amendments to the regulations do 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 Protection of Residential Mortgage or Hypothecary Insurance Regulations (made pursuant to the Protection of Residential Mortgage or Hypothecary Insurance Act). OSFI will use its existing compliance tools that may include compliance agreements and administrative monetary penalties with regard to private mortgage insurers.
Amendments to the Housing Loan (Insurance, Guarantee and Protection) Regulations (made pursuant to the National Housing Act [NHA]) will be implemented by CMHC. However, CMHC has already eliminated the portfolio insurance substitution feature. Under the NHA, OSFI is responsible for monitoring CMHC’s compliance with the Housing Loan (Insurance, Guarantee and Protection) Regulations and reporting to the Government if it was determined that CMHC was offside the regulations. CMHC reports to Parliament through the Minister of Employment and Social Development and is subject to the accountability framework for Crown corporations.
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