PROP 1023 / CHAPTER 2 Flashcards Preview

PROP 1023 > PROP 1023 / CHAPTER 2 > Flashcards

Flashcards in PROP 1023 / CHAPTER 2 Deck (25):
1

NOTE ONLY / CHARTERED BANKS

 

Chartered banks have dominated the mortgage market, with holdings increasing steadily from $29 billion in 1982 to $930 billion in 2014. 

NOTE ONLY / CHARTERED BANKS

 

Chartered banks have dominated the mortgage market, with holdings increasing steadily from $29 billion in 1982 to $930 billion in 2014. 

2

NOTE ONLY / CHARTERED BANKS

 

Chartered banks have steadily become the most important source of mortgage funds in Canada, as measured by both number of loans and lending volume.

 

A short history review provides a dramatic illustration of the effects of statutory constraints on market operation. Prior to 1954, banks were not permitted to make mortgage loans (except under the Farm Improvements Loan Act). The National Housing Act (1954) and a 1954 amendment to the Bank Act permitted banks to make and trade NHA-insured mortgages (initially loans could only be on new housing). However, the Bank Act restricted banks to a maximum 6% interest on their mortgages.

 

As a consequence, when mortgage rates increased to a rate that exceeded 6% (in 1959), banks withdrew from the mortgage market and generally did not participate until 1967 when the 6% ceiling was removed through a revision to the Bank Act. Thus, banks mortgage lending activities prior to 1967 were insignificant.
 

In 1967 the banks were also permitted to enter the conventional mortgage market, providing the loan-to-value ratio did not exceed 75%, unless the excess was insured by either CMHC or a private mortgage insurer.

 

In 2007, the maximum loan-to-value ratio increased to 80% for uninsured residential mortgages loaned by federally regulated financial institutions.

 

NOTE ONLY / CHARTERED BANKS

 

Chartered banks have steadily become the most important source of mortgage funds in Canada, as measured by both number of loans and lending volume.

 

A short history review provides a dramatic illustration of the effects of statutory constraints on market operation. Prior to 1954, banks were not permitted to make mortgage loans (except under the Farm Improvements Loan Act). The National Housing Act (1954) and a 1954 amendment to the Bank Act permitted banks to make and trade NHA-insured mortgages (initially loans could only be on new housing). However, the Bank Act restricted banks to a maximum 6% interest on their mortgages.

 

As a consequence, when mortgage rates increased to a rate that exceeded 6% (in 1959), banks withdrew from the mortgage market and generally did not participate until 1967 when the 6% ceiling was removed through a revision to the Bank Act. Thus, banks mortgage lending activities prior to 1967 were insignificant.
 

In 1967 the banks were also permitted to enter the conventional mortgage market, providing the loan-to-value ratio did not exceed 75%, unless the excess was insured by either CMHC or a private mortgage insurer.

 

In 2007, the maximum loan-to-value ratio increased to 80% for uninsured residential mortgages loaned by federally regulated financial institutions.

3

NOTE ONLY / CHARTERED BANKS

 

The 1967 changes have led to banks steadily increasing their share of the mortgage market. In 1979, banks became the largest single source of mortgage funds (residential and non-residential) in Canada. In 2010, chartered banks provided 80% of mortgage funds approved by institutional lenders.

NOTE ONLY / CHARTERED BANKS

 

The 1967 changes have led to banks steadily increasing their share of the mortgage market. In 1979, banks became the largest single source of mortgage funds (residential and non-residential) in Canada. In 2010, chartered banks provided 80% of mortgage funds approved by institutional lenders.

4

NOTE / ONLY / Mortgage Investment Corporations (MICs)

 

A mortgage investment corporation is a lending company designed specifically for mortgage lending in Canada. MICs provide expertise and an opportunity for investors to invest small amounts in a diversified real estate and mortgage portfolio, through shares in the MIC. Legislation forces a certain level of investment in mortgages but permits some equity and real estate investments in order to provide a more attractive portfolio for investors.


MICs are authorized to issue shares and borrow funds but the degree of leverage allowed is determined by the nature of the MICs investments.

NOTE / ONLY / Mortgage Investment Corporations (MICs)

 

A mortgage investment corporation is a lending company designed specifically for mortgage lending in Canada. MICs provide expertise and an opportunity for investors to invest small amounts in a diversified real estate and mortgage portfolio, through shares in the MIC. Legislation forces a certain level of investment in mortgages but permits some equity and real estate investments in order to provide a more attractive portfolio for investors.


MICs are authorized to issue shares and borrow funds but the degree of leverage allowed is determined by the nature of the MICs investments.

5

NOTE ONLY / LIFE INS COMPANIES

 

Life insurance companies were significant players in the mortgage market up until the 1980s, when they held 10% of the residential mortgage market. However, their role has diminished greatly since then, and in 2013 they held only 2.4% of residential mortgage credit.

Life insurance companies’ activity in the mortgage market began to slip in the 1970s. With concern regarding inflation and cost of living protection for insurance policy holders, the fixed dollar yield on residential mortgages reduced the attractiveness of this form of investment for the life companies. They turned to an increasing emphasis on non-residential mortgage loans and equity participation in commercial property in order to obtain some form of constant dollar protection for their policy holders. 

 

NOTE ONLY / LIFE INS COMPANIES

 

Life insurance companies were significant players in the mortgage market up until the 1980s, when they held 10% of the residential mortgage market. However, their role has diminished greatly since then, and in 2013 they held only 2.4% of residential mortgage credit.

Life insurance companies’ activity in the mortgage market began to slip in the 1970s. With concern regarding inflation and cost of living protection for insurance policy holders, the fixed dollar yield on residential mortgages reduced the attractiveness of this form of investment for the life companies. They turned to an increasing emphasis on non-residential mortgage loans and equity participation in commercial property in order to obtain some form of constant dollar protection for their policy holders. 

 

6

NHA MORTGAGE-BACKED SECURITIES

 

As previously mentioned, mortgage-backed securities (MBS), under the National Housing Act (NHA), are a significant holder of residential mortgage credit. Over the past 15 years, the share of mortgage credit in Canada that has been securitized has increased from 10% to 33%. While chartered banks approve the vast majority of NHA residential mortgage loans, they sell off a significant portion as MBS (known as “securitization” of a mortgage).

 

 

NHA MORTGAGE-BACKED SECURITIES

 

As previously mentioned, mortgage-backed securities (MBS), under the National Housing Act (NHA), are a significant holder of residential mortgage credit. Over the past 15 years, the share of mortgage credit in Canada that has been securitized has increased from 10% to 33%. While chartered banks approve the vast majority of NHA residential mortgage loans, they sell off a significant portion as MBS (known as “securitization” of a mortgage).

 

7

NOTE ONLY / NHA MORTGAGE-BACKED SECURITIES

 

NHA MBS are an investment vehicle which can be bought and sold on financial markets and are an undivided interest in a pool of amortized (insured) residential mortgages by CMHC under the National Housing Act. All MBS must be NHA insured; they are guaranteed by CMHC, and secured by the value of the underlying real estate. Investors receive scheduled principal and interest payments, paid monthly. NHA MBS are created by an issuer who brings together a pool of NHA insured mortgages. Investors purchase an interest in the pool and become entitled to regular monthly payments made by the borrowers in the pool. NHA MBS are available in $1,000 denominations. The NHA MBS program aims to provide a mechanism to convert the supply of private investor funds to mortgages at reasonable rates of interest, and to provide a more eficient secondary mortgage market.

NOTE ONLY / NHA MORTGAGE-BACKED SECURITIES

 

NHA MBS are an investment vehicle which can be bought and sold on financial markets and are an undivided interest in a pool of amortized (insured) residential mortgages by CMHC under the National Housing Act. All MBS must be NHA insured; they are guaranteed by CMHC, and secured by the value of the underlying real estate. Investors receive scheduled principal and interest payments, paid monthly. NHA MBS are created by an issuer who brings together a pool of NHA insured mortgages. Investors purchase an interest in the pool and become entitled to regular monthly payments made by the borrowers in the pool. NHA MBS are available in $1,000 denominations. The NHA MBS program aims to provide a mechanism to convert the supply of private investor funds to mortgages at reasonable rates of interest, and to provide a more eficient secondary mortgage market.

8

NOTE ONLY / FRAUD

 

There are two main types of mortgage fraud: identity fraud and value fraud. Identity fraud generally occurs when a fraudster impersonates the registered owner of a property. The fraudster can illegally transfer the title of the property into his or her own name and can secure a mortgage against the land. The risk of identity fraud can be mitigated by conducting proper research to confirm the true registered owner of a property. Value fraud occurs when there is an artificial inflation of the price of a piece of property. This might be produced by “flipping the property” or from a false assessment or appraisal.

NOTE ONLY / FRAUD

 

There are two main types of mortgage fraud: identity fraud and value fraud. Identity fraud generally occurs when a fraudster impersonates the registered owner of a property. The fraudster can illegally transfer the title of the property into his or her own name and can secure a mortgage against the land. The risk of identity fraud can be mitigated by conducting proper research to confirm the true registered owner of a property. Value fraud occurs when there is an artificial inflation of the price of a piece of property. This might be produced by “flipping the property” or from a false assessment or appraisal.

9

TRUE OR FALSE?  NHA mortgage-backed securities continue to play a significant role in residential mortgages

ANSWER:  TRUE

10

_______ banks are domestic banks that are authorized under the Bank Act to accept deposits, which may be eligible for deposit insurance provided by the Canadian Deposit Insurance Corporation. 

Schedule I banks are domestic banks that are authorized under the Bank Act to accept deposits, which may be eligible for deposit insurance provided by the Canadian Deposit Insurance Corporation. 

11

__________ banks are foreign bank subsidiaries authorized under the Bank Act to accept deposits, which may be eligible for deposit insurance provided by the Canada Deposit and Insurance Corporation. 

Schedule II banks are foreign bank subsidiaries authorized under the Bank Act to accept deposits, which may be eligible for deposit insurance provided by the Canada Deposit and Insurance Corporation. 

12

The ___________  permitted banks to make and trade NHA-insured mortgages (initially loans could only be on new housing). 

The National Housing Act (1954) and a 1954 amendment to the Bank Act permitted banks to make and trade NHA-insured mortgages (initially loans could only be on new housing). 

13

The Bank Act restricted banks to a maximum 6% interest on their mortgages. As a consequence, when mortgage rates increased to a rate that exceeded 6% (in 1959), banks withdrew from the mortgage market and generally did not participate until _____ when the 6% ceiling was removed through a revision to the Bank Act.

ANSWER:  1967

14

The 1967 changes have led to banks steadily increasing their share of the mortgage market. In _____, banks became the largest single source of mortgage funds (residential and non-residential) in Canada. 

The 1967 changes have led to banks steadily increasing their share of the mortgage market. In 1979, banks became the largest single source of mortgage funds (residential and non-residential) in Canada. 

15

NOTE ONLY  / MORTGAGE BACKES SECURITIES

 

In 1986, Canada Mortgage and Housing Corporation (CMHC) began offering NHA mortgage-backed securities. The CMHC MBS program is modelled after US Ginnie Maes that are backed by a pool of government insured mortgages and guaranteed as to timely payment by the US government.

NOTE ONLY  / MORTGAGE BACKES SECURITIES

 

In 1986, Canada Mortgage and Housing Corporation (CMHC) began offering NHA mortgage-backed securities. The CMHC MBS program is modelled after US Ginnie Maes that are backed by a pool of government insured mortgages and guaranteed as to timely payment by the US government.

16

NOTE ONLY / CHT

 

In 2001, CMHC created the Canada Housing Trust (CHT), a special purpose trust designed to create an additional source of funds for mortgage loans. The CHT issues bonds which are bought by investors, and the proceeds from these bonds are then used to purchase mortgage-backed securities.

 

Under a CHT, investors purchase the bonds and receive fixed-interest payments every six months

These payments are guaranteed by the CMHC, as all the underlying mortgages are CMHC-insured

 

This reduces the risk associated with the bond, making them an attractive and conservative investment

The proceeds received from the sale of the bonds are then used to purchase mortgage-backed securities. The proceeds from the underlying mortgages of the mortgage-backed securities are used to pay the principal and interest payments to the bondholders

The market reaction to the CHT bonds
was quite positive in the early 2000s. The initial goals of the program were to promote competition in the residential mortgage market, and to provide lower cost mortgage funding to financial institutions

The program was ultimately deemed to be very successful and bonds continue to be issued in 2009


 
 

 

NOTE ONLY / CHT

 

In 2001, CMHC created the Canada Housing Trust (CHT), a special purpose trust designed to create an additional source of funds for mortgage loans. The CHT issues bonds which are bought by investors, and the proceeds from these bonds are then used to purchase mortgage-backed securities.

Under a CHT, investors purchase the bonds and receive fixed-interest payments every six months

These payments are guaranteed by the CMHC, as all the underlying mortgages are CMHC-insured

 

This reduces the risk associated with the bond, making them an attractive and conservative investment

 

The proceeds received from the sale of the bonds are then used to purchase mortgage-backed securities. The proceeds from the underlying mortgages of the mortgage-backed securities are used to pay the principal and interest payments to the bondholders

The market reaction to the CHT bonds
was quite positive in the early 2000s. The initial goals of the program were to promote competition in the residential mortgage market, and to provide lower cost mortgage funding to financial institutions

The program was ultimately deemed to be very successful and bonds continue to be issued in 2009

17

________ occurs when an individual committing fraud purposely provides false or misleading information to obtain a mortgage on a property

Mortgage fraud occurs when an individual committing fraud purposely provides false or misleading information to obtain a mortgage on a property.

18

TRUE OR FALSE?

 

In Canada, mortgage fraud is a criminal offence that is becoming increasingly common, partly due to the electronic approach taken today in mortgage transactions.

ANSWER:

 

TRUE

19

What are the two types of mortgage fraud?

There are two main types of mortgage fraud: identity fraud and value fraud.

20

NOTE ONLY /  IDENTITY FRAUD

 

Identity fraud generally occurs when a fraudster impersonates the registered owner of a property. The fraudster can illegally transfer the title of the property into his or her own name and can secure a mortgage against the land. The risk of identity fraud can be mitigated by conducting proper research to confirm the true registered owner of a property.

NOTE ONLY /  IDENTITY FRAUD

 

Identity fraud generally occurs when a fraudster impersonates the registered owner of a property. The fraudster can illegally transfer the title of the property into his or her own name and can secure a mortgage against the land. The risk of identity fraud can be mitigated by conducting proper research to confirm the true registered owner of a property.

21

Value fraud occurs when _ _ _ _ _ _

Value fraud occurs when there is an artificial inflation of the price of a piece of property.

 

This might be produced by "flipping the property" or from a false assessment or appraisal.

22

_ _ _ _ _ _ _ _ _ _  are a type of bond that is secured by a pool of mortgage loans. Individual mortgages are pooled together and used as collateral to issue mortgage-backed securities, which are then sold to investors.

Mortgage-backed securities (MBS) are a type of bond that is secured by a pool of mortgage loans. Individual mortgages are pooled together and used as collateral to issue mortgage-backed securities, which are then sold to investors.

23

In 1986, Canada Mortgage and Housing Corporation (CMHC) began offering _ _ _ _ _ _ _

In 1986, Canada Mortgage and Housing Corporation (CMHC) began offering NHA mort­gage-backed securities.

24

The CMHC MBS program is modelled after _ _ _ _ _ _ _ _ _

The CMHC MBS program is modelled after US Ginnie Maes that are backed by a pool of government insured mortgages and guaranteed as to timely payment by the US government.

25

TRUE OR FALSE?

The CANADA HOUSING TRUST (CHT) issues bonds which are bought by investors, and the proceeds from these bonds are then used to purchase mortgage-backed securities.

ANSWER:  TRUE