New regulations on financing insured mortgages could have a much broader impact on mortgage funders, lenders and borrowers than the federal government has indicated, says Michael Feldman of Torys, a specialist in secured lending and securitizations.
On June 6, the federal government published regulations amending both the Insurable Housing Loan Regulations under the National Housing Act and the Eligible Mortgage Loan Regulation under the Protection of Residential Mortgage and Housing Corporation. The changes apply both to Canada Mortgage and Housing Corporation and Canada’s two licensed private mortgage insurers, Genworth Financial Mortgage Insurance Company and Canada Guaranty Mortgage Insurance Company.
In its Regulatory Impact Statement accompanying the amendments, the Department of Finance lists the objectives of the changes, described as follows by Feldman in a recent Torys’ bulletin:
Prohibit the use of taxpayer-backed insured mortgages as collateral in securitization vehicles that are not sponsored by CMHC;
Restore lender use of government-backed portfolio insurance to its original purpose, funding through CMHC securitization programs; and
Provide a transitional period for affected lenders to adjust to these measures.
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But the broad wording of the amendments, Feldman writes, could capture approximately 1% of the $8 billion of insured mortgages funded through asset-backed commercial paper conduits.
“Given that the total size of the Canadian ABCP market is approximately only $28.8 billion, DBRS has expressed concern that if insured mortgage loans disappear from ABCP Conduits without being substantially replaced with other financial assets (such as uninsured mortgage loans), there could be a material adverse impact on the liquidity of the entire Canadian ABCP market,” Feldman notes.
The regulations also provide for the loss of insurance when either high or low LTV loans are not securitized in time. There are no provisions, however, for a refund of premiums to the homeowner when a lender does not receive a sufficient allocation of insurance. Presumably, the homeowner could only look to recover from the original mortgagee or the ABCP conduit responsible for failing to securitize in time.
“We would expect that this would be an entirely unsatisfactory remedy for mortgagors who paid the initial insurance premiums on High LTV mortgage loans,” Feldman writes. “Eliminating the potential for this type of situation could have been easily accomplished by limiting the Regulatory Amendments to portfolio insured Low LTV loans.”