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Friday, 17 October 2014

CORPORATE APPLICANTS AND MORTGAGE BROKERS: THE DEFINITIVE GUIDE TO CHOICE

Do you work for a corporation that presently seeks or may one day, seek to apply for a mortgage? Don't go straight to a Mortgage Broker, it's the wrong thing for a corporation to do. To understand more, read below, an excerpt from the MortgageQuote.ca webpage entitled:

Corporate/Commercial (VenCap MortgageTM), Private Business Owner, Construction, Renovation & Developer Borrowers


ATTENTION ALL PROSPECTIVE CORPORATE CLIENTS:

PLEASE NOTE:
MortgageQuote.ca only accepts corporate clients if the corporate entity has approached at least their own institutional bankers first; and preferably a second banker or institutional lender in order to get a first and possibly, second institutional opinion respecting their project and mortgage financing request. Why?

Institutional bankers are the best free source of guidance and the cheapest mortgage source for corporate entities.

Rationale:
Corporations often retain Mortgage Brokers when they don't need to. In a corporate context, a corporation's own banker is a far better source of capital to a corporate applicant.

Further, corporate transactions are based upon many more factors than non-corporate transactions and decisions to lend money to corporate applicants can only take place after a complete corporate underwriting process has taken place.

Unlike with institutional banks, MortgageQuote.ca's corporate underwriting services are not free; both upfront  Mortgage Broker retainer fees and downstream Mortgage Broker service/origination fees are payable. Proper corporate governance requires that a corporation should only bind itself to a Mortgage Broker Services Agreement with MortgageQuote.ca if there is a clear and demonstrable need established for a non-bank, brokered financing solution.

Further, MortgageQuote.ca does not seek to enter into a services agreement with a corporation that could already be satisfactorily qualified for financing from an institutional bank or lender. It makes no sense because even if MortgageQuote.ca were to arrange a "cheaper mortgage", Mortgage Broker fees are still payable so when the overall cost of borrowing is calculated, the cost of the Mortgage Broker's involvement will increase the corporations overall costs and often make the broker-sourced "cheaper option", more expensive than a non-brokered institutional bank solution.

In many cases, one of the key benefits of a mortgage brokered transaction is that the Mortgage Broker may identify a lender who may be both "cheaper" and "less burdensome" conditions-wise, than the corporations current available financing option. Or, the broker-sourced lender may be more expensive but will also loan a higher amount of money, or require less conditions precedent. Only once a corporation has approached its own "go-to" bankers, can a starting level of understanding be established, so that the overall finance-raising strategy can include a determination of whether or not the corporation may want to invest in the services of a Mortgage Broker for a second opinion or alternate, broker-sourced possible financing solutions.

It would be considered poor corporate governance if a corporation simply retained a Mortgage Broker merely because the corporation does not have an employee available to manage the financing request process. This is a false logic because in many cases of corporate mortgage finance, the Mortgage Broker fee may be more than the annual salary of the corporation's average employee. Indeed, if the corporation is truly a going-concern, it should simply appoint its CFO or if the corporation does not have a CFO, then its accountant, to take the role of approaching its own bankers. That's far less expensive than a third party Mortgage Broker and proper corporate governance. Shareholders will require that all competent corporate managers would act like this.

Therefore, all potential MortgageQuote.ca corporate applicants should go to at least their existing institutional bankers first. It truly is the right thing to do.

If, after the corporation has approached at least its own bankers and the bankers can not approve the financing; or, the bank can approve some sort of financing but not enough; or, the banks conditions are too burdensome, or the bank is materially too slow, then the corporation may want to reach out to MortgageQuote.ca.

The primary contact officer of the corporation will be required to disclose to MortgageQuote.ca the efforts the corporation sought to obtain financing from at least their own bankers and why exactly they realized the bank would not be helpful.

This process establishes two critically important and indisputable things:

1 - it provides MortgageQuote.ca with an honest, 3rd Party assessment of the corporation's financing request from the bankers point of view. This will enable MortgageQuote.ca to quickly and freely understand the corporations strengths and weaknesses from a credit underwriting prospective.

2 - it provides the corporation with the realization that if their project is truly worth it to them, then a mandate for a non-bank solution, namely a Mortgage Broker solution is established. The only question left for the corporation is "which mortgage broker to use".

To learn more, email us at info[at]mortgagequote.ca.

Wednesday, 3 September 2014

2014 and Onwards: The Dawn of a New Area in Canadian Bank Refusals

Are your bankers hard to deal with? This is WHY we are in business. Here's the open secret: 2012 (and beyond) GUIDELINES TO QUALIFY FOR BANK MORTGAGESWe know the Canadian banking system and know how to use that knowledge to optimize a benefit for our customers.

An excerpt from the Bank Regulator's website:


Residential Mortgage Underwriting Practices and Procedures

Document Properties

  • Type of Publication: Guideline
  • Category: Sound Business and Financial Practices
  • Date: June 2012
  • No: B-20
  • Audiences: Banks / FBB / T&L / Life / Co-op / P&C

I. Purpose and Scope of the Guideline

The Financial Stability Board (FSB) has published Principles for Sound Residential Mortgage Underwriting Practices (“FSB Principles”), which call on all jurisdictions to ensure that entities that originate mortgages or own the resulting risk, including any entities involved in outsourcing of mortgage underwriting, adhere to the FSB Principles.
This Guideline sets out OSFI’s expectations for prudent residential mortgage underwriting, and is applicable to all federally-regulated financial institutionsFootnote1 (FRFIs) that are engaged in residential mortgage underwriting and/or the acquisition of residential mortgage loan assets in Canada. It complements relevant provisions of the Bank ActTrust and Loan Companies Act, the Insurance Companies Actand the Cooperative Credit Associations Act, as well as the Government of Canada’s mortgage insurance guarantee framework, which establishes the rules for government-backedFootnote2 insured mortgages.Footnote3
For the purpose of this Guideline, a “residential mortgage” includes any loan to an individual that is secured by residential property (i.e., one to four unit dwellings). Home equity lines of credit (HELOCs), equity loans and other such products that use residential property as security are also covered by this Guideline.
This Guideline articulates five fundamental principles for sound residential mortgage underwriting. The first principle relates to FRFI governance and the development of overarching business objectives, strategy and oversight mechanisms in respect of residential mortgage underwriting and/or the acquisition of residential mortgage loan assets.
The next three principles focus on the residential mortgage credit decision and the underwriting process, specifically the assessment of:
  • The borrower’s identity, background and demonstrated willingness to service their debt obligations on a timely basis (Principle 2);
  • The borrower’s capacity to service their debt obligations on a timely basis (Principle 3); and,
  • The underlying property value/collateral and management process (Principle 4).
These three principles should be evaluated by lenders using a holistic, risk-based approach – unless otherwise specified in this guidance. The borrower’s demonstrated willingness and capacity to service their debt obligations on a timely basis should generally be the primary basis of a lender’s credit decision. Undue reliance on collateral can pose challenges, as the process to obtain title to the underlying property security can be difficult for the borrower and costly to the lender.
The fifth principle addresses the need for mortgage underwriting and purchasing to be supported by effective credit and counterparty risk management, including, where appropriate, mortgage insurance. The final section of the Guideline summarizes disclosure and supervisory requirements.

II. Principles

Principle 1: FRFIs that are engaged in residential mortgage underwriting and/or the acquisition of residential mortgage loan assets should have a comprehensive Residential Mortgage Underwriting Policy (RMUP).Footnote4 Residential mortgage practices and procedures of FRFIs should comply with their established RMUP.

Residential Mortgage Underwriting Policy (RMUP)

The Board-approved Risk Appetite FrameworkFootnote5 should establish limits regarding the level of risk that the FRFI is willing to accept with respect to residential mortgages, and this should form the basis for the RMUP. The RMUP should further align with the FRFI’s enterprise-wide strategy and, in turn, be linked to the enterprise risk management framework.
The RMUP should reflect the size, nature and complexity of a FRFI’s residential mortgage business and should give consideration to factors and metrics such as:
  • Significant elements of the FRFI’s business strategy and approach to residential mortgage underwriting and the acquisition of residential mortgage loan assets (e.g., products, markets) – in Canada and internationally;
  • At the portfolio level, risk management practices and processes with respect to residential mortgage loans and loan assets (e.g., lending, acquisition, product, and geographic concentration limits);
  • At the individual residential mortgage loan level, acceptable underwriting and acquisition standards, criteria and limits for all residential mortgage products (e.g., credit scores, loan-to-value ratios, debt service coverage, amortization period);
  • Limits on any exceptions to residential mortgages underwritten and/or acquired;
  • Identification and escalation processes for residential mortgage underwriting and/or acquisition exceptions, if any, including a process for approval and exception reporting; and
  • The roles and responsibilities for those positions charged with overseeing and implementing the RMUP.

Board and Senior Management Oversight

Senior Management is responsible for the development and implementation of the RMUP. However, the Board of Directors (Board) of the FRFI has a critical role in providing high-level guidance to, and oversight of, Senior Management with respect to matters relating to mortgage underwriting and portfolio management.
The Board of the FRFI should review and discuss the RMUP or any changes to the RMUP. The Board should understand the decisions, plans and policies being undertaken by Senior Management with respect to residential mortgage underwriting and/or the acquisition of residential mortgage loan assets, and their potential impact on the FRFI. It should probe, question and seek assurances from Senior Management that these are consistent with the Board’s own decisions and Board-approved business and risk strategy for the FRFI, and that the corresponding internal controls are sound and being implemented in an effective manner.
The Board should require timely, accurate, independent and objective reporting on the related risks of the residential mortgage business, including the procedures and controls in place to manage the risks, and the overall effectiveness of risk management processes.
The Board should be aware of, and be satisfied with, the manner in which material exceptions to policies and controls related to residential mortgages are identified, approved and monitored, the nature of reporting to the Board, and the consequences and processes when exceptions are identified.

Internal Controls, Monitoring and Reporting

Effective control, monitoring and reporting systems and procedures should be developed and maintained by FRFIs to ensure on-going operational compliance with the RMUP. FRFIs should identify, measure, monitor and report the risks in all residential mortgage lending and acquisition operations on an on-going basis, and across all jurisdictions. The FRFI’s residential mortgage risk appetite and tolerance profile should be understood at all relevant levels of the organization.
FRFIs should have adequate processesFootnote6 in place with respect to residential mortgages to independently and objectively:
  • Identify, assess and analyze the key risks;
  • Monitor risk exposures against the Board-approved risk appetite of the FRFI;
  • Ensure that risks are appropriately controlled and mitigated, and provide assurances to the Board and Senior Management;
  • Ensure that risk management policies, processes and limits are being adhered to, and provide assurances to the Board and Senior Management;
  • Provide exception reporting, including the identification of patterns, trends or systemic issues within the residential mortgage portfolio that may impair loan quality or risk mitigation factors; and
  • Report on the effectiveness of models.

Mortgage Underwriting Declaration

A senior officer of a FRFI should make an annual declaration to the Board confirming that the FRFI’s residential mortgage underwriting and acquisition practices and associated risk management practices and procedures meet, except as otherwise disclosed in the declaration, the standards set out in this Guideline.
When a deviation from this Guideline has taken place, the nature and extent of the deviation, and the measures taken or proposed to correct or otherwise mitigate the risk associated with the deviation, should be documented and disclosed to the Board and to OSFI in full.
Principle 2: FRFIs should perform reasonable due diligence to record and assess the borrower’s identity, background and demonstrated willingness to service his/her debt obligations on a timely basis.

Background and Credit History of Borrower

FRFIs should ensure that they make a reasonable enquiry into the background, credit history, and borrowing behaviour of a prospective residential mortgage loan borrower as a means to establish an assessment of the borrower’s reliability to repay a mortgage loan.
For example, a credit bureau score, offered by the major credit bureaus, is an indicator often used to support credit granting. However, a credit score should not be solely relied upon to assess borrower qualification, as such an indicator measures past behaviour and does not immediately incorporate changes in a borrower’s financial condition or demonstrated willingness to service their debt obligations in a timely manner.
FRFIs should also ensure that they obtain appropriate borrower consent for this assessment and comply with relevant provincial and federal legislation governing the use and privacy of personal information (e.g., Personal Information Protection and Electronic Documents Act).

Loan Documentation

Maintaining sound loan documentation is an important administrative function for lenders. It provides a clear record of the factors behind the credit granting decision, supports lenders’ risk management functions, and permits independent audit/review by FRFIs and by OSFI. As well, maintaining sound documentation is necessary for lenders to demonstrate compliance with mortgage insurance requirements and ensure insurance coverage remains intact.
Consequently, FRFIs should maintain complete documentation of the information that led to a mortgage approval. This should generally include:
  • A description of the purpose of the loan (e.g., purchase, refinancing, renovation, debt consolidation);
  • Employment status and verification of income (see Principle 3);
  • Debt service ratio calculations, including verification documentation for key inputs (e.g., heating, taxes, and other debt obligations);
  • LTV ratio, property valuation and appraisal documentation (see Principle 4);
  • Credit bureau reports and any other credit enquiries;
  • Documentation verifying the source of the down payment;
  • Purchase and sale agreements and other collateral supporting documents;
  • An explanation of any mitigating criteria or other elements (e.g., “soft” information) for higher credit risk factors;
  • A clearly stated rationale for the decision (including exceptions); and
  • A record from the mortgage insurer validating approval to insure the mortgage where there may be an exception to the mortgage insurer’s underwriting policies.
The above documentation should be obtained at the origination of the mortgage and for any subsequent refinancing of the mortgage. FRFIs should update the borrower analysis periodically (not necessarily at renewal) in order to effectively evaluate their credit risk.Footnote7In particular, FRFIs should review some of the aforementioned factors if the borrower’s condition or property risk changes materially.
As a general principle, an independent third-party conducting a credit assessment of a FRFI’s mortgage loan should be in a position to replicate all aspects of the underwriting criteria, based on the FRFI’s sound documentation, to arrive at the derived credit decision.

Anti-Money Laundering/Anti-Terrorist Financing

As part of a FRFI’s assessment of the borrower, if the FRFI is aware, or there are reasonable grounds to suspect, that the residential mortgage loan transaction is being used for illicit purposes, then the FRFI should decline to make the loan and consider filing a suspicious transaction report to the Financial Transactions Reports Analysis Centre of Canada (FINTRAC) with respect to the attempted transaction.
FRFIs should ensure that residential mortgage loans are subject to the requirements of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR), as well as OSFI’s Guideline B-8 (Deterring and Detecting Money Laundering and Terrorist Financing) with respect to detecting and deterring the possible use of a property purchase or mortgage to launder the proceeds of crime or assist in terrorist financing.Footnote8
In particular, FRFIs should ensure that they comply with the customer identification and record keeping requirements of the PCMLTFR, and also ensure that they obtain sufficient information about the borrower to determine whether the customer is a higher risk customer, as defined under the PCMLTFA and PCMLTFR.
Principle 3: FRFIs should adequately assess the borrower’s capacity to service his/her debt obligations on a timely basis.

Income Verification

A borrower’s income is a key factor in the assessment of their capacity to repay the mortgage loan, and verification of income helps detect and deter fraud. FRFIs should make reasonable inquiries and take reasonable steps to verify a borrower’s underlying income. This includes substantiation of:
  • Employment status; and
  • The income history of the borrower.
For borrowers who are self-employed, FRFIs should take reasonable steps to obtain income verification (e.g., Notice of Assessment) and relevant business documentation.

Guarantors and Co-Signors of Mortgages

Where a FRFI obtains a guarantee or co-signor supporting the mortgage, it should also undertake sufficient credit due diligence on the guarantor/co-signor. For example, this should include verification of the guarantor’s/co-signor’s income, as well as a credit bureau report and a net worth statement. The guarantor/co-signor should fully understand his/her legal obligations.

Debt Service Coverage

A fundamental component of prudent underwriting is an accurate assessment of the adequacy of a borrower’s income, taking into account the relevant mortgage payments and all debt commitments. As part of this assessment, FRFIs should establish debt serviceability metrics (including the method to calculate these metrics), set prudent measures for debt serviceability (articulated in the RMUP) and calculate each borrower’s debt serviceability ratios for the purposes of assessing affordability.
Two ratios that are commonly used are the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio. For example, for insured mortgages, the Canada Mortgage Housing Corporation (CMHC) defines GDS and TDS ratios and sets maximum GDS and TDS limits. Private mortgage insurers also define similar debt serviceability metrics and limits for mortgage insurance products. OSFI expects that the average GDS and TDS scores for all mortgages underwritten and/or acquired to be less than the FRFI’s stated maximums, as articulated in its RMUP or mortgage policies, and reflect a reasonable distribution of GDS and TDS ratios across the portfolio.
FRFIs should have clear policies with respect to the contributing factors for the calculation of GDS and TDS ratios, including, but not limited to:
  • Principal and interest;
  • Other sources of income;
  • Heating costs;
  • Property taxes;
  • Guarantor or co-signor income; and
  • Monthly payment amounts for other credit facilities.
GDS and TDS ratios should be calculated conservatively (i.e., appropriately stressed for varied financial and economic conditions and/or higher interest rates). As an example, for insured mortgages, the Government of Canada’s mortgage insurance guarantee framework requires that for all variable interest rate mortgages, regardless of the term, and fixed rate mortgages with a term less than the standard five-year term, lenders use the greater of the contractual mortgage rate or the five-year benchmark rate published by the Bank of Canada.Footnote9
For uninsured residential mortgages, FRFIs should contemplate current and future conditions as they consider qualifying rates and make appropriate judgments, and not assume that the internal five-year rate is sufficiently prudent for their analysis. At a minimum, the qualifying rate for all variable interest rate mortgages, regardless of the term, and fixed rate mortgages with a term less than five years should be the greater of the contractual mortgage rate or the five-year benchmark rate published by the Bank of Canada.

Additional Assessment Criteria

In addition to income and debt service coverage, FRFIs should take into consideration other factors that would not ordinarily be captured by debt serviceability metrics, such as the borrower’s assets (e.g., savings), other living expenses and recurring payment obligations (e.g., condominium fees).
To the extent possible, income assessments should also reflect the stability of the borrower’s income, including possible negative outcomes (e.g., variability in the salary/wages of the borrower). Conversely, temporarily high incomes (e.g., overtime wages, irregular commissions and bonuses) should be suitably normalized or discounted.

Amortization

The mortgage amortization period for the loan is an important factor in the credit lending decision, as it affects the required debt service for the borrower, the speed of repayment of the mortgage and the growth of borrower equity in the underlying property.
FRFIs should have a stated maximum amortization period for all residential mortgages that are underwritten. OSFI expects that the average amortization period for mortgages underwritten to be less than the FRFI’s stated maximum, as articulated in its RMUP. Section III of this Guideline outlines public disclosure requirements for amortization periods.
Principle 4: FRFIs should have sound collateral management and appraisal processes for the underlying mortgage properties.

General

Generally, mortgage loans are granted on the basis of the borrower’s demonstrated willingness and capacity to service his/her debt obligations because the process to obtain title to the underlying property security can be costly. However, to the extent that the lender would ever need to realize on the underlying property serving as security, it is important to have sound collateral practices and procedures.

Property Appraisals

A significant amount of leverage is often involved in residential mortgage lending and there is general reliance on collateral to provide adequate recourse for repayment of the debt if the borrower defaults. As such, a proper and thorough assessment of the underlying property is essential to the residential mortgage business and key to adequately mitigating risks. FRFIs should have clear and transparent valuation policies and procedures in this regard.
In assessing the value of a property, FRFIs should take a risk-based approach, and consider a combination of valuation tools and appraisal processes appropriate to the risk being undertaken. The valuation process can include various methods, including on-site inspections, third-party appraisals and/or automated valuation tools.
On-site inspection
In general, FRFIs should conduct an on-site inspection on the underlying property, to be performed by either a qualified employee or an appraiser, depending on the nature of the property or transaction. Beyond the valuation of the property, an on-site property inspection is beneficial in the process of validating the occupancy, condition and, ultimately, the existence of the property.
Third-party appraisal
FRFIs that use third-party appraisers should ensure that appraisals are prepared with the appropriate professional appraisal skill and diligence, and that appraisers are designated, licensed or certified, and meet qualification standards. As well, these appraisers should be independent from the mortgage acquisition, loan processing and loan decision process.
Automated valuation tools
Where FRFIs use automated valuation tools, processes should be established to monitor their on-going effectiveness in representing the market value of the property. Controls should also be in place to ensure that the tools are being used appropriately by lending officers.
In general, FRFIs should not rely on any single method for property valuation. FRFIs should undertake a more comprehensive and prudent approach to collateral valuation for higher-risk transactions, such as residential mortgage loans with a relatively high LTV ratio.
Realistic, substantiated and supportable valuations should be conducted to reflect the current price level and the property’s function as collateral over the term of the mortgage. Consistent with Principle 2 above, comprehensive documentation in this regard should be maintained.
FRFIs should ensure that the claim on collateral is legally enforceable and can be realized in a reasonable period of time or, absent that verification, ensure that title insurance from a third party is in place.
When extending loans to borrowers, FRFIs should impose contractual terms and conditions that secure their full protection under the laws applicable in the relevant jurisdiction, and seek to preserve an appropriate variety of recourses (including, where applicable, actions on personal covenant) should the borrower default. In addition, FRFIs should have the necessary action plans in place to determine the best course of action upon borrower default. Such action plans should cover:
  • The likely recourses/options available to the FRFI upon default in all relevant jurisdictions;
  • The identification of the parties against whom these recourses may be exercised; and
  • A strategy for exercising these options in a manner that is prudentially sound.

Loan-to-Value (LTV) Ratio

General

The commonly-used LTV ratio is an evaluation of the amount of collateral value that can be used to support the loan. Past experience suggests it is highly correlated with credit risk. Those residential mortgage loans with higher LTV ratios generally perform worse than those with a lower LTV ratio (i.e., higher proportion of equity).
FRFIs should adhere to an appropriate maximum LTV ratio (for various types of mortgage transactions). The maximum LTV ratio may be determined by law or based on current and expected market conditions, as well as other risk factors that may impact borrowers’ ability to service their debt and/or lenders’ ability and cost to realize on their security. Section III of this Guideline outlines public disclosure requirements for LTV ratios.

Traditional Residential MortgagesFootnote10

By law, residential mortgages underwritten for the purpose of purchasing, renovating or improving a property must be insured if their LTV ratios are greater than 80 percent.Footnote11 Also, OSFI expects FRFIs to impose a maximum LTV ratio less than or equal to 65 percent for nonconforming residential mortgages.Footnote12 OSFI expects that the average LTV ratios for all conforming and non-conforming residential mortgages to be less than the FRFI’s stated maximums, as articulated in its RMUP, and reflect a reasonable distribution of LTV ratios across the portfolio.
The LTV ratio should be re-calculated upon any refinancing, and whenever deemed prudent, given changes to a borrower’s risk profile or delinquency status, using an appropriate valuation/appraisal methodology.
FRFIs should not structure a mortgage or combination of a mortgage and other lending products (secured by the same property) in any form that facilitates circumvention of the maximum LTV ratio limit it establishes in its RMUP. Further, the LTV ratio should not be relied upon solely as an alternative to assessing the borrower’s demonstrated willingness and capacity for repayment of the loan (see Principles 2 and 3).
Down Payment
With respect to the borrower’s down payment for both insured and uninsured mortgages, FRFIs should make reasonable efforts to determine if it is sourced from the borrower’s own resources or savings. Where part or all of the down payment is gifted to a borrower, it should be accompanied by a letter from those providing the gift confirming no recourse. Incentive and rebate payments (i.e., “cash back”) should not be considered part of the down payment.
Property Value used for the LTV Ratio
FRFIs should assess, and adjust as appropriate, the value of the property for the purposes of calculating the LTV by considering appropriate risk factors that make the underlying property more vulnerable to a significant house price correction or that may significantly affect the marketability of the property. These factors would include, but are not limited to, the location of the property, the type of property, its current market price and the expected use of the property for which the loan is granted.

Home Equity Lines of Credit (HELOCs)

A HELOCFootnote13 is a form of non-amortizing (revolving) credit that is secured by a residential property. Unlike a traditional residential mortgage, most HELOCs are not constructed to fit a pre-determined amortization, although regular, minimum periodic payments are generally required by most lenders.
HELOC products provide an alternative source of funds for consumers. However, FRFIs should recognize that, over time, these products can also significantly add to consumer debt loads. While some borrowers may elect to repay their outstanding HELOC balances over a shorter period of time relative to the average amortization of a typical traditional mortgage, the revolving nature of HELOCs can also lead to greater persistence of outstanding balances, and greater risk of loss to lenders. As well, it can be easier for borrowers to conceal potential financial distress by drawing on their lines of credit to make timely mortgage payments and, consequently, present a challenge for lenders to adequately assess credit risk exposure.
Given the unique features of HELOCS relative to traditional residential mortgages, FRFIs should ensure appropriate mitigation of the associated risks of HELOCs, including the ability to expect full repayment over time, and the need for increased monitoring of the borrowers’ credit quality.
OSFI expects FRFIs to limit the non-amortizing HELOC component of a residential mortgage to a maximum authorized LTV ratio of less than or equal to 65 percent.Footnote14 OSFI expects that the average LTV ratio for all HELOCs to be less than the FRFI’s stated maximums, as articulated in its RMUP, and reflect a reasonable distribution of LTV ratios across the portfolio. Section III outlines public disclosure requirements for LTV ratios and HELOCs.
Principle 5: FRFIs should have effective credit and counterparty risk management practices and procedures that support residential mortgage underwriting and loan asset portfolio management, including, as appropriate, mortgage insurance.

Mortgage Insurance

Mortgage default insurance (mortgage insurance) is often used as a risk mitigation strategy. However, mortgage insurance should not be a substitute for sound underwriting practices by FRFIs, as outlined in this Guideline. It should not be considered a substitute for conducting adequate due diligence on the borrower, or for using other risk proxies such as the minimum down payment.
FRFIs may obtain mortgage insurance from CMHC and private mortgage insurance providers. OSFI agrees that the use of either is appropriate, provided that a FRFI conduct due diligence on the mortgage insurer commensurate with its level of exposure to that insurer. When performing such an assessment, a FRFI should give consideration to, among other things, the mortgage insurer’s:
  • Claims payment record;
  • Expected future claims obligations;
  • Balance sheet strength;
  • Funding sources, including the level of and access to capital, and form, amount and sources of liquidity;
  • Management, including the quality of its governance practices and procedures; and
  • Reinsurance arrangements and the direct and indirect impact that they may have on the FRFI’s own arrangements with the insurer.
The evaluation of each FRFI’s mortgage insurance counterparty should be updated throughout the life of the insurance contract. In cases where there may be material exposures incurred but not reported losses, FRFI management should ensure that the evaluation continues beyond the expiration date of the contract to ensure that the FRFI assesses potential insurance recoverable from expected future claims.
For insured mortgages, FRFIs should meet any underwriting or valuation requirements set out by the mortgage insurer to ensure the validity of insurance on those loans.

Purchase of Mortgage Assets Originated by a Third Party

FRFIs that acquire residential mortgage loans that have been originated by a third party should ensure that the underwriting standards of that third party – including due diligence on the borrower, debt service coverage, collateral management, LTV ratios, etc. – are consistent with the FRFI’s RMUP and compliant with this Guideline. FRFIs should not rely solely on the attestation of the third party.

Model Validation and Stress Testing

FRFIs often use models to contribute to residential mortgage underwriting and/or acquisition decisions (e.g., valuation or bankruptcy models) or to make lending decisions by way of autoadjudication.
FRFIs are expected to have an independent validation process at both inception and on a regular basis for these models. This would include the regular review and recalibration of risk parameters with respect to their mortgage portfolio. The models used should reflect the nature of the portfolio and, as appropriate, be adapted if there is substantial variation of risk within the portfolio. This could include the development of new models to capture specific risk segments.
Additionally, FRFIs should have a stress-testing regime that considers unlikely, but plausible, scenarios and their potential impact on the residential mortgage portfolio. The results of such stress testing should be considered in the on-going validation of any models and substantially reflected in FRFIs’ Internal Capital Adequacy Assessment Process (ICAAP)Footnote15 (deposit-taking institutions) or internal target capital ratio (insurance companies).

Higher-Risk Asset Portfolios

Heightened Prudence

FRFIs have the flexibility to underwrite and/or acquire a wide range of residential mortgages with varying risk profiles. However, for residential mortgage loan asset portfolios of FRFIs that constitute greater credit risks (e.g., non-conforming mortgages), OSFI expects FRFIs to exercise heightened prudence through:
  • Greater Board and senior management oversight of the asset portfolio;
  • Increased reporting and monitoring of the residential mortgage loan asset portfolio by management;
  • Stronger internal controls (i.e., additional substantiation of credit qualification information, enhanced credit approval processes, greater scrutiny by the risk management oversight function, etc.);
  • Stronger default management and collections capabilities; and
  • Increased capital levels backstopping the impact of portfolio risk (see next section).

Adequacy of Regulatory Capital

OSFI expects that FRFIs will maintain adequate regulatory capital levels to properly reflect the risks being undertaken through the underwriting and/or acquisition of residential mortgages. FRFIs should reflect mortgage loan assets with inherently greater risk either in their risk-based rating systems or through risk-sensitive increases in capital identified through their ICAAP (deposit-taking institutions) or internal target capital ratio (insurance companies).

III. Guideline Administration

Disclosure Requirements

Increased disclosure leads to greater transparency, clarity and public confidence in FRFI residential mortgage underwriting practices. As a matter of principle, FRFIs should publicly disclose sufficient information related to their residential mortgage portfolios for market participants to be able to conduct an adequate evaluation of the soundness and condition of FRFIs’ residential mortgage operations.
Public disclosures related to residential mortgages should include, but not limited to, the publishing by residential mortgage lenders and acquirers that are FRFIs, on a quarterly basis, and in a format and location that will support public availability and understandability:
  • The amount and percentage of the total residential mortgage loans and HELOCs that are insured versus uninsured. This should include the FRFI’s definition of “insured”. In addition, a geographic breakdown for the amount and percentage of the total residential mortgage loans and HELOCs that are insured versus uninsured – provincially in Canada, as well as from foreign operations;
  • The percentage of residential mortgages that fall within various amortization period ranges significant for the FRFI, e.g., 20-24 years, 25-29 years, 30-34 years, 35 years and greater – in Canada, as well as from foreign operations;
  • The average LTV ratio for the newly originated and acquired uninsured residential mortgages and HELOCs at the end of each period. In addition, a geographic breakdown for the average LTV ratio for the newly originated and acquired uninsured residential mortgage loans and HELOCs – provincially in Canada, as well as from foreign operations; and
  • A discussion on the potential impact on residential mortgage loans and HELOCs in the event of an economic downturn.
To meet the above disclosure requirements, the presentation of foreign operations can be grouped into one category, such as “other jurisdictions”.

Supervision of FRFI

Information for Supervisory Purposes

Enhanced transparency and sound documentation, will allow OSFI to better understand the FRFI’s financial position and economic impacts and risks associated with a FRFI’s residential mortgage underwriting and acquisition practices. A FRFI is required to maintain and provide to OSFI, upon request, its RMUP and associated management reports. A FRFI should promptly inform OSFI if it becomes aware of any mortgage underwriting issues that could materially impact its financial condition.

Non-compliance with the Guideline

OSFI supervises FRFIs in order to determine whether they are in sound financial condition and to promptly advise the FRFI Board and Senior Management in the event the institution is not in sound financial condition or is not complying with supervisory requirements. OSFI is required to take, or require the Board and/or Senior Management to take, necessary corrective measures or series of measures to deal with prudential soundness issues in an expeditious manner and to promote the adoption by management and boards of directors of financial institutions of policies and procedures designed to control and manage risk.
Where a FRFI fails to adequately account and control for the risks of underwriting or acquisition of residential mortgages, on a case-by-case basis, OSFI can take, or require the FRFI to take, corrective measures. OSFI actions can include heightened supervisory activity and/or the discretionary authority to adjust the FRFI’s capital requirements or authorized asset-to-capital multiple, commensurate with the risks being undertaken by the FRFI.

IV. Other Guidance

This Guideline is complementary to, and should be read in conjunction with, other OSFI guidance:
  • Corporate Governance Guideline
  • Guideline B-1 (Prudent Person Approach)
  • Guideline B-2 (Large Exposure Limits)
  • Guideline B-8 (Deterring and Detecting Money Laundering and Terrorist Financing)
  • Capital Adequacy Requirements Guideline
  • Guideline A-4 (Internal Target Capital Ratio for Insurance Companies)


Footnotes

Footnote 1
This includes financial institutions incorporated, continued or regulated under the Bank ActTrust and Loan Companies Act,Insurance Companies Act and the Cooperative Credit Associations Act.
Footnote 2
The Protection of Residential Mortgage or Hypothecary Insurance Act (PRMHIA) came into force on January 1, 2013.
Footnote 3
For the purpose of this guideline, “insured mortgages” refers to mortgages insured against loss caused by default on the part of a borrower under a loan secured by real property.
Footnote 4
The RMUP can be one consolidated document or a set of mortgage policy documents.
Footnote 5
The requirements for the Risk Appetite Framework are summarized in the OSFI Corporate Governance Guideline.
Footnote 6
Typically, these processes are carried out by the FRFI’s risk management oversight function.
Footnote 7
FRFIs should update the borrower analysis using a risk-based approach.
Footnote 8
The PCMLTFA and the PCMLTFR do not apply to property and casualty insurance companies.
Footnote 9
The benchmark rate (5-yr conventional mortgage rate) is published weekly by the Bank of Canada in Series V80691335.
Footnote 10
This includes home equity loans with a specified amortization period (i.e., “second mortgages”).
Footnote 11
See the Bank Act, subsection 418(1); Trust and Loan Companies Act, subsection 418(1); Insurance Companies Act, subsection 469(1); and the Cooperative Credit Associations Act, subsection 382.1 (1).
Footnote 12
The definition of “non-conforming” varies across FRFIs. In general, the definition can include non-income qualifying loans, loans to those with low credit scores or high debt serviceability ratios, mortgages where attributes of the property cause the loan to carry elevated credit risk (e.g., illiquid properties) or any loan that has clear deficiencies relative to a conforming residential mortgage.
Footnote 13
For the purpose of this guideline, all reverse mortgages, or any non-amortizing (revolving) credit product secured by residential property, are considered to be HELOCs.
Footnote 14
Additional mortgage credit (beyond the LTV ratio limit of 65 percent for HELOCs) can be extended to a borrower. However, the loan portion over the 65 percent LTV ratio threshold should be amortized.
Footnote 15
Deposit-taking institutions establish a level of capital adequate to support the nature and level of an institution’s risk. Each federally-regulated deposit-taking institution is responsible for developing and implementing its own ICAAP for the purpose of setting internal capital targets and developing strategies for achieving those internal targets that are consistent with its business plans, risk profile and operating environment. See OSFI Guideline E- 19.

Monday, 28 April 2014

Are you Really Pre-Approved?




This article is written by Anoop Bungay and originally published in the Calgary Real Estate News, Mortgage Matters section in 2001/2002.

Are you Really Pre-Approved?

Each of you have probably heard this mortgage disaster story. It starts off with someone looking for a home and visiting a lender in order to be pre-approved for a mortgage. After a few questions, the lender says, “Congratulations, you Qualify! Go ahead, find a house for no more than “x” dollars and we will guarantee your rate for 90 days”. Everything seems fine for our new home buyers until they find their dream home, put in an offer (which becomes accepted) and go back to the bank in order to finish the paperwork.

After all the job letters, paystubs, downpayment verification is presented, the lender comes back and says, “oh, I am sorry, you no longer qualify, we can not get you approved”.

What happened? How could this happen? What do you do so this does not happen to you?…

In the example, our buyers learned the difference between Pre-Qualifying and Pre-Approval.

Pre-Qualify:

Pre-qualification is part of the pre-approval process. It is simply a calculation of how much an applicant "may" qualify for given unverified gross income figures. The lender finds out where you work, how much you make and what your expenses are.

Based upon that information they calculate the maximum amount of financing you would qualify for. This is a simple procedure and you are not asked to provide documents such as job letters, paystubs, tax returns, etc.

To be pre-qualified does not mean that you are ready to go to the lawyers office because the lenders have not taken into consideration all of the other factors that affect you. For example, there is no credit check or formal income and downpayment verification.

Lenders often provide you with a pre-qualification simply to let you know what you can afford. If you are really serious about purchasing a new home, then you should be asking for a Pre-Approval.

Pre-Approval:

When you are pre-approved, it means that the lender has reviewed the financial information from your application and has determined a maximum amount of financing you can afford. The information required for a pre-approval is more than pre-qualification because you are asked to provide all of your documentation up front. For example, you will be required to show your letter of employment, your recent paystub, your T4’s or Notice of Assessments. You may also have to provide almost as detailed as that required for a proper mortgage approval.

The benefits of being pre qualified are numerous, the more important of which include:

• shopping within your price range without having the concern or risk that major complications will arise in the final hour (like the buyers in our example).

• you may be able to make a stronger purchase offer without "subject to financing" conditions. Therefore, your Realtor will be able to negotiate harder on your behalf and get you your home ahead of other competing offers.

The only thing left after a pre-approval is getting the lenders approval of the property, usually determined by an appraisal. In summary the pre-qualification process has 5 steps:

1. Phase 1: An initial pre qualification is given based on unverified gross income figures.

2. Phase 2: A full pre qualification, yet unverified, is done based on information provided in the mortgage application.

3. Phase 3: Verification of all financial information including income and employment, savings and equity, etc.

4. Phase 4: Verification of credit worthiness.

5. Phase 5: Lender approval of property through a property appraisal.


Pre-Quantification

Pre-quantification is part of the pre-qualification process. It is simply a calculation of how much an applicant "may" qualify for given unverified gross income figures, and utilizing a Gross Debt Service Ratio (GDSR). The calculation also takes into consideration expected expenses.

The lender then takes the amount calculated and comes up with the maximum amount of financing you would qualify for based on your income. This procedure is simply the reverse of calculating a mortgage payment given the payment amount, amortization and interest rate.

Ask your licensed mortgage broker for more information. Or email info[at]mortgagequote.ca.


Wednesday, 29 January 2014



Why is my mortgage broker sending me to MortgageQuote.ca?


I can answer your question on behalf of  [mortage broker]  My name is Anoop Bungay and I am President of MortgageQuote Canada Corp. (www.mortgagequote.ca). 

Our firm description (found on our website main page):

MortgageQuote.ca is a Canadian mortgage broker and national agent for privatemortgagees.com, the organization of Accredited Class® private mortgage investors and non-bank lenders. We address the realities of the "new normal" in the Canadian mortgage marketplace, now that traditional (mainstream) lender's are not as helpful as they once were and traditional mortgage brokers are limited to an increasingly reduced lender pool, with little to differentiate one another. Our solution is to bypass the Canadian banking system and provide institutional and private (non-bank) mortgage and nonmortgage© solutions for quality-minded borrowers, licensed brokers and Accredited Class® investorsService in Alberta (AB) , British Columbia (BC)Ontario (ON) and select jurisdictions nationally and internationally.  


In your case, (questioner's name), your mortgage situation is absolutely different from what traditional lenders are willing to consider due to issues including location, nature of property, current condition of property, nature of transaction (renovation/construction). Moreover, with the new bank rules imposed by the federal government (called B-20 look it up internet), traditional lenders are required to be more cautious in all lending situations, partly in order to ensure that Canada does not re-live the events of the great credit crisis of the 2000's.

As you know, [your mortgage broker] works with [Mortgage brokerage company which has a national network and works with over 85 lenders nationally.

The problem [your mortgage broker] is facing is that your mortgage situation is so unique that even she is unable to find a lender within her 85+ system of lenders and that's where we come in.

Either myself or one of my team members will t-up with you by phone in order to say "hi" and answer any initial questions that you might have. From there, we can sketch out a solution.

This is an absolutely custom service that no bank or traditional lender could ever do and it is our pleasure to help find a solution that works for you.