PROP 1023 / CHAPTER 3 Flashcards
What are the federal government’s general objectives with respect to mortgage lending?
The federal government’s general objectives with respect to mortgage lending have included the following:
to encourage new employment in residential construction and related industries;
to assist and encourage home ownership;
to stimulate the housing market in periods of downturns;
to improve housing conditions;
to encourage innovation and sustainability; and
to provide supportive housing/affordable housing/rental housing.
The _____________ is considered to be one of the most significant historical pieces of Canadian housing legislation.
The Dominion Housing Act of 1935 is considered to be one of the most significant historical pieces of Canadian housing legislation. Its long-lasting impacts have been its effect on private mortgage lending practice and its initiation of the process of continuing federal participation in residential mortgage lending.
What was the main program introduced under the Dominion Housing Act of 1935?
The main program introduced under this Act was joint lending by the government and institutional lenders on new houses for owner-occupancy or rental.
Funds for joint mortgages were supplied by both the government and the approved institutional lenders, e.g., insurance, trust, and loan companies.
The approved lenders were responsible for the administration of loans. The government provided 20% of the lending value and the private lenders provided between 50% and the permitted maximum of 60%. Therefore, loan-to-value ratios were 70% to 80%.
The Dominion Housing Act also introduced to Canadian mortgage practice the now standard _ _ _ _ _ _
The Dominion Housing Act also introduced to Canadian mortgage practice the now standard constant payment plan (or amortization plan) where the loan is repaid by equal monthly payments of principal and interest
The overriding objective of 1954’s revised National Housing Act was to _ _ _ _ _
The overriding objective of 1954’s revised National Housing Act was to increase the supply of mortgage money available from private lenders.
To bring about an increase in private funds and a shift toward private lending, three major innovations were introduced with the NHA (1954). These all centred on the activities of the approved lenders. List all three innovations.
To bring about an increase in private funds and a shift toward private lending, three major innovations were introduced with the NHA (1954). These all centred on the activities of the approved lenders.
(1) Joint lending was replaced by government insured loans, the full amount of which were provided by the lenders.
(2) The Bank Act was changed to permit chartered banks to lend on mortgages insured under the National Housing Act (1954).
(3) Provision was made to establish a secondary market for insured loans (e.g., resale market). The sale of insured loans to investors other than approved lenders would increase both the supply of mortgage funds and the liquidity of the insured loans.
Outine the major concern for home buyers in the 1970’s and how CMHC responded to these concerns?
Affordability was a major concern for home buying in the 1970s. To improve housing affordability, builders reduced lot sizes and increased the density of developments.
To appeal to first-time buyers and stimulate the housing market, CMHC introduced the Assisted Home Ownership program (AHOP) in 1971, to help low-income individuals attain home ownership.
Under this program, borrowers would receive a monthly subsidy from CMHC intended to reduce mortgage payments to that produced by a substantially below-market 8% interest rate. The AHOP program was offered from 1973 to 1978
Outline the Home Buyers’ Plan?
Home Buyers’ Plan (HBP)
This federal program allows individuals the ability to withdraw up to $25,000 ($50,000 for a couple) tax-free from a Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home. The amounts withdrawn remain tax-exempt if they are repaid within 15 years, generally with a minimum annual repayment of 1/15th of the total amount withdrawn.
In response to the high interest rates in the 1980s, CMHC introduced _ _ _ _ _ _
In response to the high interest rates in the 1980s, CMHC introduced a mortgage rate protection program that guaranteed a maximum interest rate increase upon renewal.
In 1986, CMHC introduced mortgage backed securities (MBS) as an alternative to investing in individual residential mortgages.
What are the benefits of mortgage backed securities (MBS)?
MBS help to ensure a ready supply of low-cost funds for housing finance and to keep mortgage lending costs as low as possible for home owners.
___________ is arguably the most prominent and significant of CMHC’s programs. Its introduction in the 1950s, combined with changes in the Bank Act and National Housing Act, shifted the structure of the mortgage finance market to today’s dominance of chartered banks.
Mortgage loan insurance is arguably the most prominent and significant of CMHC’s programs.
Its introduction in the 1950s, combined with changes in the Bank Act and National Housing Act, shifted the structure of the mortgage finance market to today’s dominance of chartered banks.
Federally regulated financial institutions such as chartered banks require mortgage loan insurance in order to make loans with loan-to-value ratios higher than ____%.
Federally regulated financial institutions such as chartered banks require mortgage loan insurance in order to make loans with loan-to-value ratios higher than 80% (increased from 75% in 2007). With mortgage loan insurance, it is possible for borrowers to receive loans with loan-to-value ratios of 95%, subject to some limitations.
With mortgage loan insurance, it is possible for borrowers to receive loans with loan-to-value ratios of up to ___%, subject to some limitations.
ANSWER: 95%
NOTE ONLY
With Canadian mortgage loan insurance, the lender pays the insurer a single premium, the cost of which is generally passed on to the borrower.
The borrower either pays the premium in a lump sum payment or, more commonly, adds it to the loan amount and repays it with the regular mortgage payment. The amount of the premium is expressed as a percentage of the loan amount, with the percentage increasing as the loan-to-value ratio is increased.
Premiums vary with the risk associated with the loan within broad rate classifications. Application fees were eliminated in 2006.
If the premium is added to the loan amount, the amount of the premium is not included in the calculation of the loan-to-value ratio. However, the gross debt service ratio applies to the full amount of the mortgage payments, including the amount which repays the insurance premium. As well, if the premium is added to the loan amount, the full face value of the loan, including the premium, is insured. No additional fees or premiums for loan insurance are charged annually or upon renewal of a mortgage at the end of the term, even though the insurance is in force for the full amortization period. Chapter 7 provides information on specific premiums charged by CMHC.
NOTE ONLY
With Canadian mortgage loan insurance, the lender pays the insurer a single premium, the cost of which is generally passed on to the borrower.
The borrower either pays the premium in a lump sum payment or, more commonly, adds it to the loan amount and repays it with the regular mortgage payment. The amount of the premium is expressed as a percentage of the loan amount, with the percentage increasing as the loan-to-value ratio is increased. Premiums vary with the risk associated with the loan within broad rate classifications. Application fees were eliminated in 2006.
If the premium is added to the loan amount, the amount of the premium is not included in the calculation of the loan-to-value ratio. However, the gross debt service ratio applies to the full amount of the mortgage payments, including the amount which repays the insurance premium. As well, if the premium is added to the loan amount, the full face value of the loan, including the premium, is insured. No additional fees or premiums for loan insurance are charged annually or upon renewal of a mortgage at the end of the term, even though the insurance is in force for the full amortization period. Chapter 7 provides information on specific premiums charged by CMHC.
NOTE ONLY
Mortgage loan insurance provides a feasible method of financing high-ratio loans without increasing the risk to the lender. By making high ratio financing viable, mortgage loan insurance creates access to home ownership for many Canadians who otherwise would not be able to purchase their homes.
Borrowers using insurance obtain maximum financing, often up to 95% of the lending value of the property, which reduces equity requirements.
Borrowers obtain maximum financing at a prime rate and avoid the high interest costs of a second mortgage.
Borrowers avoid the additional legal costs and other costs of arranging second mortgage financing.
As amortization periods on second mortgages are typically shorter than on first mortgages, the initial payments on a first and second mortgage would be higher than on a high ratio first mortgage.
The mortgage property is generally more saleable in that a smaller down payment would be required, providing the new purchaser qualifies for the insurance package.
NOTE ONLY
Mortgage loan insurance provides a feasible method of financing high-ratio loans without increasing the risk to the lender. By making high ratio financing viable, mortgage loan insurance creates access to home ownership for many Canadians who otherwise would not be able to purchase their homes.
Borrowers using insurance obtain maximum financing, often up to 95% of the lending value of the property, which reduces equity requirements.
Borrowers obtain maximum financing at a prime rate and avoid the high interest costs of a second mortgage.
Borrowers avoid the additional legal costs and other costs of arranging second mortgage financing.
As amortization periods on second mortgages are typically shorter than on first mortgages, the initial payments on a first and second mortgage would be higher than on a high ratio first mortgage.
The mortgage property is generally more saleable in that a smaller down payment would be required, providing the new purchaser qualifies for the insurance package.
