Module 1: Overview Of The Industry

Question 1

What is the concept of equity redemption?

Answer 1

Originally the seller of a property retained ownership until the loan was fully paid. However, this made it difficult to pay off the mortgage resulting in the practice changing so that the purchased took ownership of the property while they were paying off the mortgage.

Question 2

What is principal risk and where did it originate from?

Answer 2

Principal risk is the risk that individuals will not pay back the principal balance on their mortgage. This resulted from times during the 1920s and 30s when mortgages were setup like bonds. Interest only was paid during the life of the loan and the principal was paid back in full at the end. Because at times a home value would fall below the borrowed amount, borrowers were just walking away from the home.

Question 3

What is a fully amortized mortgage?

Answer 3

When mortgage payments remain constant and a split of interest and principal is apart of the payment.

Question 4

Does the federal government play a direct or indirect role in the housing market?

Answer 4

Indirect

Question 5

When could chartered banks enter the mortgage market?

Answer 5

1954, allowed through the bank act

Question 6

When did the partially amortized mortgage come into play?

Answer 6

1970s

Question 7

When were mortgage backed securities introduced?

Answer 7

1986

Question 8

What happened in 1992?

Answer 8

Home buyers plan introduced. Can draw up to $25,000 from RRSP tax free for purchase of first home. Must be paid back over 15 years.

Question 9

At what LTV is mortgage insurance required for?

Answer 9

Over 80% LTV

Question 10

What is the max TDS and GDS for credit scores above 680?

Answer 10

GDS 39% and TDS 44%; however when using CMHC its GDS 35% and TDS 42%

Question 11

What is the partially ammortized mortgage?

Answer 11

Similar to fuly ammortized mortgage however, there are numerous terms involved over the life of the mortgage at which rates are re-negotiated.

Question 12

What % of the mortgage market do the big 6 banks make up?

Answer 12

67%

Question 13

What % of the mortgage market do ‘other banks’ make up?

Answer 13

5%

Question 14

What % of the mortgage market do credit unions make up?

Answer 14

14%

Question 15

Define a mortgage

Answer 15

The mortgage is not the loan! The mortgage is the security of land the borrower gives to the mortgage lender to obtain the loan.

Question 16

True or False, CMHC backs Mortgage Backed Securities (MBSs)

Answer 16

True

Question 17

Outline some of the differences between the Canadian and American Mortgage Markets:

Answer 17

-Most Canadian MBSs are backed by CMHC, meaning that those investing in MBSs you have a guarantee by a Canadian government program will be backing the potential default of these mortgages.
-Default insurers will refuse to insure high risk borrowers, thus you know the pool of mortgages within the MBSs are fairly safe.

Question 18

Define the different types of mortgage lenders:

Answer 18

-Prime Lender: Considered ‘A’ deals, borrower would qualify at most major financial institutions, good quality property, reasonable loan.
-Alternative Lending: Called ‘B’ and ‘C’ deals, borrowers ability to repay is less certain, mortgage amount relative to property value may be too high.
-Private Mortgages: Mortgage loans made by wealthy, private individuals, often to borrowers who have bad credit and cannot get a mortgage from a traditional lending institution.

Question 19

What is the difference between Mortgage Backed Securities ad Canada Mortgage Backed Bonds?

Answer 19

Canada Mortgage Bonds reduce the risk of Cash Flow uncertainty for investors, compared to Mortgage Backed Securities. (Mortgages under CMB’s cant be prepaid whereas mortgages under MBSs can).

Question 20

Define a mortgage originator:

Answer 20

Any mortgage professional engaged in the acceptance, completion and/or submission of mortgage loan applications to an underwriting lender.

Question 21

What is a Mortgage Representative?

Answer 21

Mortgage represenatives (also referred to as ‘mortgage specialists’ or ‘mobile mortgage advisors’) work for financial institutions, many on a comission or a bonus basis. They develop new business leads from their contracts within the community.
-Governed federally under the OSFI, not required to hold a provincial licence/registration under the MRA

Question 22

What is a mortgage lender referred to as?

Answer 22

The Mortgagee

Question 23

What is a mortgage borrower referred to as?

Answer 23

The Mortgagor

Question 24

What is Title Insurance?

Answer 24

Title insurance compensates the insured for losses resulting from the title, the legal evidence that shows the rightful owner of land, not being as stated in the policy.

Question 25

What are the three categories of mortgage originators:

Answer 25

-Mortgage Brokers
-Associate Mortgage Brokers
-Lender-employed mortgage representatives (those working at the bank)