Regulations Amending the Eligible Mortgage Loan Regulations: SOR/2020-296
Canada Gazette, Part II, Volume 155, Number 1
SOR/2020-296 December 22, 2020
PROTECTION OF RESIDENTIAL MORTGAGE OR HYPOTHECARY INSURANCE ACT
The Minister of Finance, having consulted with the Governor of the Bank of Canada and the Superintendent of Financial Institutions, pursuant to subsection 42(1) of the Protection of Residential Mortgage or Hypothecary Insurance Act footnote a, makes the annexed Regulations Amending the Eligible Mortgage Loan Regulations.
Ottawa, December 18, 2020
Minister of Finance
Regulations Amending the Eligible Mortgage Loan Regulations
1 Section 8 of the Eligible Mortgage Loan Regulations footnote 1 is replaced by the following:
Low ratio loans — before October 15, 2008
8 (1) The criterion set out in paragraph 6(1)(a) does not apply to a low ratio loan in respect of which the mortgage insurer received a mortgage or hypothecary insurance application before October 15, 2008 if it meets the requirements of a mortgage or hypothecary loan insurance product that was offered by the mortgage insurer before that date.
Low ratio loans — October 15, 2008 to April 17, 2011
(2) The criterion set out in paragraph 6(1)(a) does not apply to a low ratio loan in respect of which the mortgage insurer received a mortgage or hypothecary insurance application during the period beginning on October 15, 2008 and ending on April 17, 2011.
Low ratio loans — before July 1, 2016
(3) The criterion set out in paragraph 6(1)(d) does not apply to a low ratio loan if the mortgage insurer received a mortgage or hypothecary insurance application in respect of the loan — or in respect of the portfolio of loans to which the loan will belong for insurance purposes — before July 1, 2016, unless the application has been denied or the loan has ceased to be insured under insurance resulting from the application.
Low ratio loans — March 24, 2020 to December 31, 2020
(4) The criteria set out in paragraphs 6(1)(e) to (g) do not apply to a low ratio loan if
- (a) the loan was funded before March 20, 2020;
- (b) the purpose of the loan
- (i) includes the purchase of the eligible residential property against which it is secured,
- (ii) is the discharge of the outstanding balance of a prior low ratio loan, or
- (iii) is the refinancing of a loan that is secured by an eligible residential property;
- (c) the amortization schedule is not to exceed 30 years from the day on which the loan was funded; and
- (d) the mortgage insurer received a mortgage or hypothecary insurance application in respect of the loan – or in respect of the portfolio of loans to which the loan will belong for insurance purposes – during the period beginning on March 24, 2020 and ending on December 31, 2020.
Coming into Force
2 These Regulations are deemed to have come into force on March 20, 2020.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the regulations.)
The Government of Canada took immediate and significant action to support Canadian individuals and businesses facing financial hardship as a result of the economic impacts of the global pandemic.
On March 20, 2020, the Minister of Finance announced amendments to the mortgage insurance eligibility criteria, set out in regulations made under the National Housing Act (NHA) and Protection of Residential Mortgage or Hypothecary Insurance Act (PRMHIA). These changes helped provide stable funding and liquidity to financial institutions and mortgage lenders to support continued lending to Canadian businesses and consumers.
Mortgage insurance covers two main categories of loans:
- A. high ratio loans, which have loan-to-value ratios above 80%; and
- B. low ratio loans, which have loan-to-value ratios of 80% or less.
Federally regulated lenders are required by legislation to insure high ratio loans at the time the loan is granted. This is referred to as transactional insurance and is typically paid by the home owner. Low ratio mortgage insurance is optional and can be purchased at any time throughout the life of the loan and is more often paid for by the lender.
Portfolio or “bulk” insurance is the most common form of low ratio mortgage insurance. Lenders pool together mortgages that are uninsured at origination and purchase default insurance on all the loans in the pool. The pools are then converted into tradeable financial assets through Canada Mortgage and Housing Corporation (CMHC) securitization programs and purchased by investors. Insuring and selling off pools of mortgages provides lenders a stable source of funding through which they can continue lending, thereby increasing the available amount of mortgage funding in the market.
If an insurer is unable to make insurance payouts to lenders (for insured mortgages in default), the Government backs 100% of CMHC’s mortgage insurance obligations. In order for private mortgage insurers to compete with CMHC, the Government also 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’s guarantee of mortgage insurance is intended to promote stability in the housing market, financial system and economy; support access to home ownership for creditworthy buyers; and foster-lender competition. 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. These regulatory amendments introduce temporary changes to the mortgage insurance eligibility rules.
Securitization allows lenders to sell securities backed by loans to investors, thereby providing funding for the underlying loans. Similarly, CMHC’s residential mortgage securitization programs provide mortgage lenders with a government-backed mechanism for funding residential mortgages, although the underlying residential mortgages must first be insured, either by CMHC or by an approved mortgage insurer.
The Minister of Finance is temporarily modifying, via regulations, retroactive to March 24, 2020, the criteria that low ratio residential mortgages must meet in order to be eligible for mortgage insurance, effectively making more mortgages eligible for mortgage insurance. The modifications were in support of CMHC’s March 16, 2020 launch of the Insured Mortgage Purchase Program (IMPP). Under the IMPP, the government may purchase insured mortgage pools through CMHC.
The objective of these actions was to provide long-term stable funding to banks and mortgage lenders, help facilitate continued lending to Canadian consumers and businesses, and add liquidity to Canada’s mortgage market.
Effective March 24, 2020, the following low loan-to-value mortgages funded prior to March 20, 2020, are eligible for government-guaranteed insurance:
- 1. low loan-to-value mortgages with a maximum amortization term up to 30 years commencing from when the loan was funded;
- 2. low loan-to-value mortgages whose purpose includes the purchase of a property, subsequent renewal of such a loan, or refinancing.
All other eligibility criteria for government-guaranteed insurance continue to apply to these mortgages. The above amendments will remain in effect until December 31, 2020, at which time the eligibility criteria will revert to the existing rules.
The temporary changes to eligibility criteria for low ratio mortgage insurance were exempted from prepublication in response to the need to mitigate financial stability risk stemming from extraordinary market turmoil in liquidity and funding markets in the spring of 2020. The Minister of Finance consulted with the Governor of the Bank of Canada and the Superintendent of Financial Institutions on these temporary changes, 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.
Following the announcement, the Department of Finance held discussions with CMHC and with private mortgage insurers for advice on drafting the regulatory amendments to implement the new policies.
Modern treaty obligations and Indigenous engagement and consultation
No impacts to Indigenous peoples have been identified for these amendments.
The eligibility criteria for mortgage insurance are set out in regulations, so the only way to modify them is through a regulatory amendment.
Benefits and costs
The Canadian economy faces ongoing challenges associated with the COVID-19 pandemic. These amendments were brought forward to help provide the benefits of stable funding and liquidity to financial institutions and mortgage lenders and continued lending to Canadian businesses and consumers in light of the COVID-19 pandemic. The underlying need of providing stable funding and liquidity in a crisis situation has passed, and as the changes are no longer needed, they will expire on December 31, 2020, as intended.
The amendments align with the Department of Finance’s ongoing objective to promote and maintain financial stability, and to promote strong, inclusive and sustainable economic growth, one of the Department’s four priorities.
Small business lens
The small business lens does not apply to these amendments, as there are no costs on small business.
The one-for-one rule does not apply to these amendments, as there is no change in administrative costs to business.
Regulatory cooperation and alignment
There were no regulatory cooperation or alignment considerations.
Strategic environmental assessment
In accordance with the Guidelines for Implementing the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, we have completed a preliminary scan. The scan did not identify the potential for important environmental effects, either positive or negative.
Gender-based analysis plus
No gender-based analysis plus (GBA+) impacts have been identified for these amendments.
Implementation, compliance and enforcement, and service standards
These temporary amendments to the eligibility criteria for low ratio mortgage insurance came into effect as of March 24, 2020, and were announced on March 20, 2020, via a news release. The National Housing Act and the Protection of Residential Mortgage or Hypothecary Insurance Act allow the regulations to have a coming into effect date as early as the announcement date.
The amendments were exempted from prepublication in response to the need to mitigate financial stability risk stemming from extraordinary market turmoil in liquidity and funding markets in the spring of 2020.
The Minister of Finance consulted with the Governor of the Bank of Canada and the Superintendent of Financial Institutions on these amendments, 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.
Compliance and enforcement
These amendments 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 Eligible Mortgage Loan Regulations (made pursuant to the Protection of Residential Mortgage or Hypothecary Insurance Act). OSFI may 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 whether 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.
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