On June 4, the Canada Mortgage and Housing corp. issued an update to its Multi-Unit Mortgage Loan Insurance program. The major areas impacted are outlined in this article:
1) Refinances: Effective June 4, CMHC is removing the measures that have been in place since May 2020 restricting the use of refinance proceeds. This means:
- Any lender can be in place prior to refinance, there is no longer a restriction on only being able to pay out a CMHC-approved lender.
- There is no restriction on what refinance proceeds can be used for. CMHC’s new technical guidelines indicate that a refinance loan can be made to assist property owners to carry out improvements, refinance existing encumbrances, convert accumulated equity into cash for other purposes, or a combination thereof.
This will allow for more flexibility with refinances, improve profit margins with renovating and refinancing multifamily properties, and allow capital to flow more freely out of the multifamily sector.
This may ultimately result in more capital being able to flow back into the multifamily sector and will also significantly reduce red tape and administrative burden on lenders in enforcing these rules.
2) MLI Select Scoring for Energy Efficiency: Effective June 19, the number of points that can be obtained through this social outcome will be reduced as follows:
This will mean obtaining maximum benefits in the MLI Select program with 100 points will be reserved exclusively for projects that provide some level of affordability. This appears to be the social outcome CMHC is aiming to encourage.
Note that these changes will not apply to applications submitted before June 19.
3) Amortizations Increasing for MLI Standard (Market) Program: Effective June 19, CMHC is extending the maximum amortization for new construction projects in the MLI Standard (Market) Program to 50 years (from 40 years). A comparison of new construction loans between the two programs are shown in the table below.
This change will allow for higher leverage and lower mortgage payments in the standard program for new construction projects, which may make it more attractive than previously. However, the leverage may still be lower than the MLI Select program due to the higher debt service ratios. In addition, the premiums for the standard program remain materially higher than MLI Select (especially at higher leverage and amortizations).
4) Approved Correspondent Program is Changing:
Current Situation: Mortgage Brokers are able to submit multi-unit applications directly to CMHC, under the name of an approved lender. Once the CMHC approval (Certificate of Insurance or COI) is obtained, industry practice is that if the approved lender listed on the COI didn’t win the deal, that lender would transfer its interest in the COI to the lender that was selected for the transaction.
Changes: Effective Sept. 3, only approved lenders will be permitted to submit CMHC multi-unit applications directly to CMHC. In addition, we understand that lenders will not be able to transfer their interest in the CMHC COI to other lenders with the same frequency as previously and will be required to fund at least 80 per cent of the loans for which they obtain approval.
What it Means: This will mean brokers and borrowers will need to obtain quotes and select a lender prior to obtaining CMHC approval. This will provide certainty and clarity as to who the lender will be that will ultimately fund the loan.
When it comes to costs, in the current structure lenders provide lower rates to brokers (compared to loans done directly with a borrower) as a significant portion of the work has already been completed by the broker by the time the file gets to the lender.
We expect this lower pricing structure to remain after the changes take effect – especially for the better brokerages with strong experience with CMHC, comprehensive loan packages and seamless integration with lenders – such that lenders are able to simply review and forward applications into CMHC prepared by brokerages.
Mortgage brokerage value proposition
In addition to these cost savings, the mortgage brokerage value proposition for CMHC loans remains robust, including:
- Speed: There is significant administrative burden being added to lenders – many of whom are already stretched for capacity; as such we expect the speed of mortgage broker loan package preparation to be significantly faster than that of lenders;
- Knowledge of lenders: Mortgage brokerage teams with high volumes of transactions will have intimate knowledge of each lender’s terms, flexibilities and processes and be able to effectively guide borrowers to the right capital partner;
- Loan Structuring & Guidance: Experienced mortgage brokerages are able to ensure loans are set up to meet the needs of the borrower and are set up for success;
- Reduced Time & Effort: Mortgage brokerages are able to reduce administrative burden on borrowers in preparing the loan application;
- Certainty of Execution: Ultimately working with a mortgage brokerage that is unbiased and puts the borrowers’ best interest first will provide certainty that a mortgage will fund as required.
Other changes
Classification of Projects: Effective June 4, CMHC is introducing greater flexibility in cases where a new construction project is built in the place of a previously existing residential structure, which has been fully demolished.
Amortization Extension for Default Management: Effective June 19, for the purposes of re-amortization as a default management tool, the maximum amortization period will be extended from 40 years to 50 years for loans approved under Standard (Market) MLI and up to 55 years for loans approved under MLI Select.
Environmental Site Contamination: Effective June 4, as a transitional measure CMHC will accept applications submitted by approved lenders for construction financing with known site contamination. Mortgage loan insurance approvals will be conditional on confirmation of a contamination-free site prior to first advance.