Canada's New Rules on Financing of Insured Mortgages

On February 10, the Federal Government published final regulations amending both the Insurable Housing Loan Regulations under the National Housing Act (Canada) (NHA)1 (applicable to mortgage loans insured by Canada Mortgage and Housing Corporation (CMHC)) and the Eligible Mortgage Loan Regulations under the Protection of Residential Mortgage or Hypothecary Insurance Act (applicable to mortgage loans insured by licensed private mortgage insurers).2 3 Since the amendments to both regulations are nearly identical, we will refer to them collectively as the “Final Regulations.” The Final Regulations are currently in force.

We previously discussed draft versions of the Final Regulations that had been published in the Canada Gazette on June 6, 2015 (the Draft Regulations) in our earlier bulletin dated June 10, 2015 entitled “New Rules on Financing of Insured Mortgages Could Have Far Reaching Impact.” While the Final Regulations also implemented stricter down-payment requirements for insured mortgages announced by the Federal Government in December 2015, the focus of this bulletin is on the differences between the Draft Regulations and the Final Regulations as they pertain to the matters dealt with in the Draft Regulations. In particular, the most important differences involve the application of the transitional provisions of the Final Regulations.

What You Need To Know

Based on clarifications that we obtained from the Department of Finance:

  • Mortgage lenders who have securitized pools of insured mortgage loans (pools of loans) before July 1, 2016 may continue to add insured loans to such pools after July 1, 2016 in accordance with the contractual arrangements existing on July 1, 2016.
  • Absent the application of the transitional rules, no securities may be issued on the direct basis of a pool of loans after July 1, 2016 other than securities guaranteed by CMHC.
  • Where marketable securities have been issued on the basis of a pool of loans before July 1, 2016, securities can continue to be issued on the basis of such pool until December 31, 2021, provided that no insured mortgages are permitted to be in securitization vehicles that are not sponsored by CMHC after December 31, 2021.
  • As a result, (i) mortgage lenders who have established securitization programs for insured loans may continue to use them until December 31, 2021 in accordance with the contractual arrangements in place on July 1, 2016; and (ii)  mortgage lenders who do not have such programs established before July 1, 2016 will not be able to securitize insured loans other than through mortgage-backed securities issued under the NHA (NHA MBS) or Canada Mortgage Bonds (CMB) issued by Canada Housing Trust from that date onward.

The Amendments

Two regulatory amendments in the Final Regulations were originally introduced in the Draft Regulations.

The first amendment is a new insurance eligibility requirement stipulating that “if the loan is part of a pool of loans on the direct basis of which marketable securities are issued, any securities issued on the direct basis of the pool after July 1, 2016 must be guaranteed [by CMHC].”  CMHC currently operates two securitization programs. The first involves the issuance of NHA MBS by issuers authorized by CMHC (approved issuers) pooling insured mortgages and issuing NHA MBS specifically backed by these mortgage pools. The second involves the issuance by Canada Housing Trust―a special purpose entity sponsored by CMHC―of term bonds, called Canada Mortgage Bonds (CMB), which are secured by NHA MBS provided by approved sellers. For both of these programs, CMHC charges a guarantee fee which has been steadily increasing in the past two years and the federal government controls the amount of NHA MBS and CMB that it will permit CMHC to guarantee each year.  Therefore, approved issuers and approved sellers have no assurance that they will be allowed to issue as much NHA MBS (either to the market or to Canada Housing Trust) as they wish or that it will continue to be economical for them to do so.

The second amendment provides that portfolio insured mortgage loans must be securitized pursuant to a CMHC program within six months of being insured, subject to certain specified exceptions. This requirement would also apply to portfolio-insured mortgage loans released upon the maturity of NHA MBS. The consequence of non-compliance is that the mortgage insurer will be required to cancel the insurance on the “stale-dated” mortgage loans. There are four exceptions to this “six months to securitize through CMHC” rule. These are: (i) the loan becomes insured on an individual basis; (ii) the loan was insured but fell into arrears prior to the expiry of the six month period; (iii) as long as 95% of the lender’s portfolio insured loans meets the above securitization through CMHC requirement or any of the exceptions, portfolio insurance coverage may be provided for up to a maximum of 5% of a lender’s insured mortgage loans which do not satisfy the securitization requirement; and (iv) the loan has been securitized privately on a permitted basis (for example, the loan forms part of a pool of loans on the basis of which securities were issued before July 1, 2016).

Transitional Provisions

The transitional provisions of the Final Regulations are very different from those provided for in the Draft Regulations. The Draft Regulations stipulated a high-water mark for any insured loan pool balance as of June 30, 2015, requiring the pool balance to be below 50% of that high-water mark by December 31, 2017, and requiring that the pool balance to be reduced to zero by December 31, 2020. In the Final Regulations, however, the transitional provisions do not provide for a high-water mark, instead merely stipulating that the two regulatory amendments described above do not apply to an insured loan “that is part of a pool of loans on the direct basis of which marketable securities were issued before July 1, 2016 during the period beginning on that day and ending on December 31, 2021.”

There is some ambiguity as to the meaning of these transitional provisions depending on how the term “pool of loans” is to be interpreted. One possible interpretation is that “pool of loans” means the pool of loans as it existed on July 1, 2016 and that the addition of any loans to that pool after that date would constitute a new pool of loans.  That would have the effect of ensuring that no new insured loans could be added to an existing securitization program after July 1, 2016 and that whatever insured loans were in such program would either have to run off within 5½ years or, if they did not run off by that time, they would have to be removed from the securitization program by December 31, 2021. An alternative interpretation is that the constitution of the pool of loans does not matter so long as there was a pool of loans prior to July 1, 2016. The constitution of the pool of loans could change at any time up to December 31, 2021 at which point insured loans would have to be removed from the securitization program.

We consulted with the Department of Finance to seek clarification of its intention concerning the operation of the Final Regulations. The Department of Finance indicated that its intention is that “pool of loans” should be taken to mean a grouping of insured loans, on the direct basis of which marketable securities were issued prior to July 1, 2016, governed by contract terms existing on July 1, 2016. This can be described on the basis of a number of specific examples, outlined below, for which we also sought clarification.

  • If a securitization program provides a seller with a contractual commitment on July 1, 2016 to securitize up to $100 million of insured loans, the seller may maintain its pool balance at $100 million after July 1, 2016, regardless of the actual pool balance on July 1, 2016, provided that no insured loans are in the program after December 31, 2021.
  • After July 1, 2016, amendments to contractual arrangements that seek to increase the size of the permitted pool of insured loans will not be permitted.
  • If a securitization program in effect on July 1, 2016 allows for subsequent sales but does not provide for a committed facility, the seller should nevertheless be entitled to top up its pool balance to whatever the pool balance was on June 30, 2016, provided that no insured loans are in the program after December 31, 2021, but will not be permitted to exceed the June 30, 2016 pool balance.
  • If a seller has created a large pool of insured loans through a special purpose entity or a custodian prior to July 1, 2016, and it has sold a co-ownership interest in that pool of loans to another special purpose entity that issued marketable securities on the direct basis of that co-ownership interest before July 1, 2016, then additional co-ownership interests in that pool of loans could be sold to other special purpose entities after July 1, 2016 and before December 31, 2021 to support the issuance of new marketable securities, provided that no insured loans are in the program after December 31, 2021.

In each of the examples noted above, we stipulate that the intention of the Department of Finance is that no insured loans may be in any securitization program, other than CMHC sponsored programs, after December 31, 2021. We do not believe that this interpretation of the Final Regulations is clear. For example, even where no new securities are issued after July 1, 2016 pursuant to the transitional provisions, the restriction in the Final Regulation is on the issuance of new marketable securities which are directly based on a pool of insured loans after July 1, 2016. There is no limitation on the maturity of any marketable securities issued before July 1, 2016. Similarly, the plain meaning of the transitional provisions of the Final Regulations would permit the issuance of marketable securities directly based on a pool of insured loans between July 1, 2016 and December 31, 2021 without any limitation on the maturity of such securities. Nevertheless, based on indications from the Department of Finance as to its intention, it would be prudent for any issuer of asset-backed securities based on insured loans to seek assurances from Department of Finance and the relevant insurers before issuing any such securities that have maturity dates beyond December 31, 2021.

The transitional provisions will create two types of mortgage lenders after July 1, 2016: those that have pre-existing securitization programs and those that do not. Those that have pre-existing securitization programs will be able to continue to securitize insured loans for another 5½ years, including portfolio insured loans that are not securitized through NHA MBS within six months of being portfolio insured. Those that do not have pre-existing pools of insured loans upon which a securitization program is based prior to July 1, 2016 will only be able to securitize insured loans after that date through NHA MBS or CMB.

As a result, any mortgage lender that does not currently have a securitization program for insured mortgages other than through NHA MBS or CMB should consider establishing one prior to July 1, 2016 in order to preserve the optionality of being able to securitize insured mortgages through a pre-established securitization program until December 31, 2021.

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1 SOR/2016 – 10.

2 SOR/2016 – 9, Feb 3, 2016

3 Currently these private insurers are Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2017 by Torys LLP.
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