Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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Almost two years ago, OSFI introduced the idea of Residential Mortgage Underwriting for the lenders. It promised that there will be one for the insurer too.

Now it has delivered on that promise. In its new B-21 guideline it has outlined the expectations for prudent residential mortgage insurance underwriting. It applies to all federally regulated mortgage insurers (FRMIs).

Let us have a quick look at those expectations –

  • FRMI’s (federally-regulated mortgage insurers) governance and the development of business objectives

Residential Mortgage Insurance Underwriting Plan (RMIUP)

The RMIUP is a document (or set of documents) that consolidates the FRMI’s key mortgage insurance underwriting policies. It includes a description of a FRMI’s business objectives, risk appetite, and risk management policies. The RMIUP also contains other key elements that relate to, or support, mortgage insurance underwriting.

  • FRMI’s interaction with lenders. –

  • Establishing Standards for the Initial Assessment and Qualification of Mortgage Lenders. – A FRMI should ensure that a lender applying for mortgage insurance coverage is adequately qualified to offer and service mortgage loans and that it has adequate processes in place to comply with the FRMI’s mortgage insurance coverage requirements, before providing mortgage insurance coverage to that lender.
  • Mortgage Insurance Criteria and Insurance Coverage Requirements for Lenders – A FRMI should establish prudent underwriting criteria, which specify the characteristics and parameters of insurable mortgage loans for lenders.
  • Criteria for Mortgage Loans
    • Mortgage Loan Parameters:
      • Allowable loan purpose;
      • Allowable loan security position;
      • Maximum mortgage loan size and, if applicable, maximum exposure to any one borrower and/or related parties;
      • Maximum loan-to-value (“LTV”) ratio; and
      • Maximum allowable loan term and amortization length.
    • Borrower’s Background and Willingness and Capacity to Service Debt:
      • Borrower eligibility:
      • Background and Credit History:
      • Down Payment:
      • Income and Employment Verification:
      • Debt Service Coverage:
    • Underlying Mortgage Property:
      • Insurable Property Types:
      • Responsibility for Property Valuation:
      • Property Valuation Assessment:
      • General Property Requirements:
      • Mortgage Insurance Premiums:
  • Insurance Coverage – Conditions and Requirements for Lenders
    • Description of Mortgage Insurance Coverage:
    • Complete, Accurate and Timely Information:
    • Documentation Retention:
    • Access to Information:
    • Updated Information:
    • Property Valuation:
    • Property Condition:
    • Lenders’ Management of Delinquent and Defaulted Loans:
    • Conditions for the Sale or Transfer of Mortgage Loans and/or Servicing Rights:
    • Conditions for Mortgage Insurance Exceptions:
    • Fraud Detection and Reporting:
  • Termination of Insurance Policy:
  • FRMI’s Periodic Assessments of Lenders’ Underwriting Practices
  • FRMI’s internal underwriting operations and risk management.

  • Assessment and Validation of Underwriting Systems, Models, and Underwriters’ Processes
    • Automated Underwriting Systems and Models
    • Mortgage Insurance Underwriters’ Processes
  • Effective Portfolio Risk Management and other Risk Mitigation
    • Portfolio Risk Management and Stress Testing
    • Reinsurance
    • Higher-Risk Insured Mortgage Loans

So, there is a long list of good practices to follow – drafted by OSFI. Most of these points are already covered by the insurers but this new initiative will attempt to close any leftover loop-holes in the system.