Implementation of New Government Guarantee Parameters (1-4 Unit Properties)

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1 For Distribution to Mortgage Professionals Implementation of New Government Guarantee Parameters (1-4 Unit Properties) Operational Questions and Answers November 30, 2016* General 1. What happens if an approved insurance application which is excluded from the new rules is resubmitted with changes? CMHC will recognize the original receipt date of the emili application, provided that the property and borrower(s) are the same, subject to pre-october 17, 2016 parameters and standard CMHC risking. 2. What if there are delays in funding the loan? *Revised A low ratio loan which is documented and planned to fund before May 1, 2017 will be eligible for an exception to the new Government Guarantee Parameters. Acknowledging industry realities and to accommodate delays that may occur and are beyond the lender's or borrower's control, the pre- October 17 parameters will continue to apply if funding is later delayed, provided the loan is funded before November 1, For the transition period, do low ratio loans need to be fully funded by May 1, 2017 to be considered on an exception basis and subject to pre-october 17 parameters? For the purpose of implementation of the new eligibility criteria for low ratio loans, funded by means the date of the first advance. 4. Will mortgage assumption applications be subject to the new government guarantee parameters? Assumption of the same insured loan on the same property by a new borrower does not affect the existing mortgage loan insurance. If the covenant of the original borrower is also to be released, the new borrower must be at least as financially strong as the original borrower was at the time of approval, as per CMHC s Insurance Servicing Handbook for Approved Lenders. Note, Portfolio Insurance is not assignable or transferable by the Approved Lender to other parties, including other Approved Lenders. *Replaces previously released Question and Answer documents dated October 12 and 17, 2016

2 5. What is considered to be a legally binding commitment for the purpose of grandfathering applications? Is a purchase and sale agreement or a mortgage preapproval sufficient? A range of agreements or documents may constitute a legal commitment. An application may be considered for insurance if the lender is of the opinion it is legally bound to make the loan or the borrower entered into a legally binding agreement of purchase and sale, if conditions are met. This assessment is based on the specifics of the document or agreement. 6. Is the definition of owner-occupied changing? *New No, for homeowner loans, CMHC does not intend to change the definition of owner-occupied which is currently based on existing regulatory requirements. CMHC also has a policy requirement that the home will be occupied by the borrower, by a person related to the borrower by marriage, common-law partnership or any legal parent-child relationship. 7. How many homes per borrower/co-borrower can have CMHC-insured financing? *New CMHC is not changing its policy on the number of homes permitted per borrower/co-borrower in the case of a homeowner loan (owner occupied 1-4 unit properties). For homeowner loans insured on a transactional basis (high and low ratio loans), a borrower/coborrower is permitted CMHC-insured financing on a maximum of one home at any given time. Borrowers with CMHC-insured financing on more than one home prior to this policy change (which came into effect May 30, 2014) continue to have access to the Portability feature provided the home being purchased is comprised of 1-unit. The above restriction does not apply to Portfolio Insurance or transactionally insured rental loans (nonowner occupied). 8. Will CMHC continue to consider a dissolution of relationship scenario as a purchase transaction? *New Yes, CMHC-insured financing remains available to facilitate the acquisition of a departing borrower s interest in the property in the event of a dissolution of a relationship. The loan purpose includes the purchase of a residential property. The financing needed to acquire the borrower s interest in the property, when combined with any prior encumbrance, must not exceed 95% of the value of the property. There cannot be any matrimonial debts or pre-payment penalties or fees included in the new financing. To be eligible for the premium rate to be applied to the Increase to Loan Amount, the original loan must be CMHC-insured. The premium rate will be applied to the Total Loan Amount if the original loan is not CMHC-insured. 9. Do the maximum ratios of 39% (GDS) and 44% (TDS) still require the recommended minimum credit score of 680? *New CMHC will continue to normally restrict debt service ratios to 35% (GDS) and 42% (TDS) for transactional insurance (high and low ratio loans). Notwithstanding the foregoing, for borrowers who have a strong history of managing credit, CMHC will consider loan applications with a GDS ratio up to 2

3 39% and TDS ratio up to 44%. The recommended guideline for this flexibility is generally considered to be a minimum credit score of 680. Per Advice 205, GDS/TDS limits of 39%/44% will also apply to Portfolio Insurance the timing as to when the criteria can be met may differ as set out in Section 5.0 Portfolio Insurance. 10. Some lenders place a collateral mortgage charge above the originally insured amortizing loan, is it possible to re-advance on the same collateral mortgage charge without impacting insurability of the original insured amortizing loan? *New Yes, provided that the original insured amortizing loan remains unchanged (i.e. no increase to the original principal amount or extension of amortization) and all other uninsured loans advanced remain separate and distinct under the collateral charge. Changes to Low-Ratio Mortgage Insurance Eligibility Requirements 11. Are refinance loans eligible for No. Refinance loans are not eligible for insurance (on a transactional or portfolio basis). In this context, a refinance loan includes any instance where the terms of a loan are substantially modified (e.g. increase in original principal amount, extension of the amortization period, amortization in excess of 25 years). This excludes grandfathered and transition period loans provided the loan remains unchanged. 12. Are non-owner occupied properties eligible for Yes. Small rental loans for non-owner occupied 2-4 unit properties are eligible for low ratio insurance. Single units must be owner occupied. 13. Is a purchase transaction that includes improvements eligible for Yes. 14. Do the new low ratio eligibility criteria apply to loans being switched if the loan met the grandfathered loan requirements? Provided the loan remains unchanged, the grandfathered loan may be switched to another lender without the requirement to meet the low ratio eligibility criteria if the new lender subsequently requests mortgage insurance. 15. Do the new low ratio eligibility criteria apply to loans being renewed if the loan met the grandfathered loan requirements? Provided the loan remains unchanged, the loan may be renewed without the requirement to meet the low ratio eligibility criteria if the lender subsequently requests mortgage insurance. 3

4 16. For the criteria related to the property value which must be below $1,000,000, what if the Lender is switching in a loan where the original purchase price was less than $1,000,000 and the current market value is greater than $1,000,000? This specific requirement (i.e. property value <$1,000,000) may be applied at the time of purchase or at time of renewal. In this case, given the original purchase price was less than $1,000,000, this loan would have met this specific requirement. 17. If a Lender is switching in a mortgage, does the new Lender have to confirm that the original loan purpose of the loan was a purchase transaction or that the original amortization period was set at 25 years? *New No, the new Lender is not required to complete any due diligence to confirm the original loan purpose or the original amortization period. However, the amortization period at time of the loan transfer must be the lesser of the remaining amortization on the loan or 25 years. 18. Is blended amortization for Portability with Increase still permitted? *New Yes, where an increase to the loan amount is requested and the existing loan has a remaining amortization period in excess of 25 years, CMHC will recognize the originally agreed upon amortization schedule on the existing insured funds for Portability applications. The 25-year amortization maximum will apply to the new funds only, which may be blended resulting in a blended amortization above 25 years. Note this applies to insured homeowner owner occupied and insured rental non-owner occupied transactions. 19. How are collateral mortgage charges impacted with respect to multiple loan components including amortizing and non-amortizing loans? *New Scenario 1 In 2014, a borrower purchases a property and sets up a collateral charge with an amortizing loan (A) of $300,000 (25 year amortization) and an amortizing loan (B) of $50,000 (35 year amortization) and a non-amortizing loan (C) of $25,000. i) In 2015, the non-amortizing loan (C) is converted to an amortizing loan of $25,000 with a 30 year amortization. Which loans, if any, would be eligible for mortgage loan Given amortizing loan A and B were advanced in 2014 prior to the new government guarantee parameters, both loans are considered grandfathered and would be eligible for mortgage loan insurance. Given the non-amortizing loan C was converted to an amortizing loan in 2015 which is prior to the new government guarantee parameters, amortizing loan C would also be eligible for mortgage loan insurance. ii) In 2017, the non-amortizing loan (C) is converted to an amortizing loan of $25,000 with a 25 year amortization, is this loan eligible for mortgage loan Given this loan was set up as a non-amortizing loan and was not converted to an amortizing loan until after the new government guarantee parameters took effect, this loan is not eligible for mortgage loan insurance. 4

5 Scenario 2 In 2017, a borrower purchases a property and sets up a collateral mortgage charge with an amortizing loan (A) of $300,000 (35 year amortization). i) In 2020, the remaining amortization is 32 years, is the loan eligible for mortgage loan Given the amortizing loan was advanced in 2017 (i.e. after the new government guarantee parameters took effect) with an amortization schedule of more than 25 years, the loan is not eligible for mortgage loan insurance. ii) In 2027, the remaining amortization is 25 years, is the loan eligible for mortgage loan Given the amortizing loan was advanced in 2017 (i.e. after the new government guarantee parameters took effect) with an amortization schedule of more than 25 years, the loan is not eligible for mortgage loan insurance. iii) In 2020, the borrower takes out another amortizing loan (B) of $50,000 (25 year amortization), and in 2027 the borrower switches the collateral mortgage charge including components A and B to another Approved Lender. Is the loan eligible for mortgage loan Given both loans under the collateral mortgage charge are amortizing loans and have a remaining amortization of 25 years or less, provided there are no new funds advanced at time of the switch, the loan is eligible for insurance. Applying a Mortgage Rate Stress Test to High Ratio Insured Mortgages (Updated from October 12, 2016) 20. When does the requirement to apply a Mortgage Rate Stress Test come into effect? All applications submitted for high ratio insurance on or after October 17, 2016 are subject to the Mortgage Rate Stress Test requirement (not including grandfathered loans). 21. Does the Mortgage Rate Stress Test requirement announced in Advice No. 204 apply to both high and low ratio insured mortgages? The new mortgage rate stress test requirement communicated in Advice No. 204 is for high ratio insured loans. All requirements for low ratio (transactional and portfolio) insurance applications are outlined in Advice 205 for Low Ratio Mortgage Insurance Eligibility Requirements. 5