MORTGAGE INSURANCE

Mortgage insurance (which is sometimes called mortgage default insurance) is a credit risk management tool that protects lenders from losses on mortgage loans. If a borrower defaults on a mortgage, and the proceeds from the foreclosure of the property are insufficient to cover the resulting loss, the lender submits a claim to the mortgage insurer to recover its losses.

The law requires federally regulated lenders to obtain mortgage insurance on loans in which the homebuyer has made a down payment of less than 20 per cent of the purchase price (also called high loan-to-value loans). The homebuyer pays the premiums for this insurance, which protects the lender if the homebuyer defaults.

The Government backs insured mortgages in Canada. It is responsible for the obligations of Canada Mortgage and Housing Corporation (CMHC) as it is an agent Crown corporation. In order for private mortgage insurers to compete with CMHC, the Government backs private mortgage insurers’ obligations to lenders, subject to a deductible equal to 10 per cent of the original principal amount of the loan.

In October 2008, the Government adjusted its minimum standards for the mortgage insurance guarantee framework, including:

• Fixing the maximum amortization period for new government-backed insured mortgages to 35 years.

• Requiring a minimum down payment of five per cent for new government-backed insured mortgages.

• Establishing a consistent minimum credit score requirement.

• Requiring the lender to make a reasonable effort to verify that the borrower can afford the loan payment.

• Introducing new loan documentation standards to ensure that there is evidence of reasonableness of property value and the borrower’s sources and level of income.

In April 2010, the Government took additional measured steps to support the long-term stability of Canada’s housing market and continue to encourage home ownership for Canadians. Adjustments to the mortgage insurance guarantee framework included:

• Requiring that borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term.

• Lowering the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes.

• Requiring a minimum down payment of 20 per cent on non-owner-occupied properties purchased for speculation.