Vol. 149, No. 23 — June 6, 2015

Regulations Amending the Eligible Mortgage Loan Regulations

Statutory authority

Protection of Residential Mortgage or Hypothecary Insurance Act

Sponsoring department

Department of Finance

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the regulations.)

Issues

Economic Action Plan 2013 announced that the Government of Canada would prohibit the use of taxpayer-backed insured mortgages as collateral in securitization vehicles that are not sponsored by the Canada Mortgage and Housing Corporation (CMHC), and restore taxpayer-backed portfolio insurance to its original purpose of allowing access to funding for mortgage assets. These measures would increase market discipline in residential lending and reduce taxpayer exposure to the housing sector.

The Government backs residential mortgage insurance provided by 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; therefore, the Government stands behind 100 per cent of its obligations. The Government also backs private mortgage insurers’ obligations to lenders, subject to a 10 per cent deductible. That is, in the unlikely event of a private mortgage insurer winding-up, the Government would honour lender claims for government-backed insured mortgages (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 per cent of the original principal amount of the insured mortgage.

Mortgage insurance can be used to insure (1) high loan-to-value mortgage loans (i.e. loan-to-value ratio greater than 80 per cent); or (2) low loan-to-value mortgage loans (i.e. loan-to-value ratio of 80 per cent or less). Federally regulated lenders are required to insure high loan-to-value mortgage loans. Some lenders also choose to insure low loan-to-value mortgage loans. Low loan-to-value portfolio insurance is a mortgage insurance product lenders use to insure a pool of mortgages at some point after the mortgages have been provided to the borrowers. The original policy intent of portfolio insurance was to increase lenders’ access to mortgage funding through CMHC securitization programs.

After the global financial crisis, lenders increased their use of insured mortgages in private funding vehicles (e.g. asset-backed commercial paper). At the same time, some lenders began insuring large volumes of mortgages using portfolio insurance, but were not pooling these mortgages into a CMHC securitization vehicle for funding purposes. The portfolio insurance allowed these lenders to benefit from holding lower amounts of regulatory capital.

Objectives

Description

“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 on small business.

Consultation

The Government solicited views from residential mortgage lenders and mortgage insurers on these measures in 2013 and 2014. The proposed regulations take into account stakeholder feedback as necessary, 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 proposed regulations related to portfolio insurance incorporate a number of technical adjustments, providing operational flexibility as requested by stakeholders. This includes 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 proposed regulations require that portfolio insurance expires 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, and the alternative proposed in the regulations provides operational flexibility based on stakeholder feedback.

Rationale

The prohibition on the use of insured mortgages would limit the use of government-backed insured mortgages outside of CMHC securitization programs, reducing taxpayer exposure and increasing market discipline in residential lending by encouraging the development of fully private funding options.

The portfolio insurance measure would 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 CMHC securitization purposes.

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 Employment 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: finlegis@fin.gc.ca

PROPOSED REGULATORY TEXT

Notice is given that the Minister of Finance, pursuant to subsection 42(1) of the Protection of Residential Mortgage or Hypothecary Insurance Act (see footnote a), proposes to make the annexed Regulations Amending the Eligible Mortgage Loan Regulations.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Wayne Foster, Director, Capital Markets Division, Department of Finance, 90 Elgin Street, 13th Floor, Ottawa, Ontario K1A 0G5 (tel.: 613-369-3968; fax: 613-369-3894; email: finlegis@fin.gc.ca).

Ottawa, May 20, 2015

JOE OLIVER
Minister of Finance

REGULATIONS AMENDING THE ELIGIBLE MORTGAGE LOAN REGULATIONS

AMENDMENTS

1. Subsection 5(1) of the Eligible Mortgage Loan Regulations (see footnote 1) is amended by striking out “and” at the end of paragraph (i), by adding “and” at the end of paragraph (j) and by adding the following after paragraph (j):

2. (1)Section 6 of the Regulations is amended by striking out “and” at the end of paragraph (a), by adding “and” at the end of paragraph (b) and by adding the following after paragraph (b):

(2) Section 6 of the Regulations is renumbered as subsection 6(1) and is amended by adding the following:

Exception

(2) The criterion set out in paragraph (1)(c) does not apply if at least 97% of the lender’s insured low ratio loans, other than those that are insured on an individual basis, fall under one of the situations referred to in that paragraph or are exempt from that criterion under subsection 8(3) or section 8.1.

3. Subsection 8(2) of the Regulations is replaced by the following:

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 January 1, 2016

(3) The criterion set out in paragraph 6(1)(c) does not apply to a low ratio loan that is not part of a pool of loans on the basis of which securities have been issued 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 January 1, 2016, unless the application has been denied or the loan has ceased to be insured under insurance resulting from the application.

4. The Regulations are amended by adding the following after section 8:

TRANSITIONAL PROVISIONS

January 1, 2016 to December 31, 2017

8.1 (1)During the period beginning on January 1, 2016 and ending on December 31, 2017, the criteria set out in paragraphs 5(1)(k) and 6(1)(c) do not apply to a loan that is part of a pool of loans on the basis of which securities were issued before January 1, 2016 if the total amount of insured loans that are part of the pool does not exceed the total amount of all insured loans that were part of the pool on June 30, 2015.

January 1, 2018 to December 31, 2020

(2) During the period beginning on January 1, 2018 and ending on December 31, 2020, the criteria set out in paragraphs 5(1)(k) and 6(1)(c) do not apply to a loan that is part of a pool of loans on the basis of which securities were issued before January 1, 2016 if the total amount of all insured loans that are part of the pool does not exceed 50% of the total amount of all insured loans that were part of the pool on June 30, 2015.

COMING INTO FORCE

5. These Regulations come into force on January 1, 2016, but if they are published in the Canada Gazette, Part II, after that day, they come into force on the day on which they are published.

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