According to the CMHC’s framework for residential mortgage underwriting, lenders are now encouraged to conduct more robust borrower assessments, including a full review of employment history and an analysis of income sources. The new rules also include requirements for more frequent assessments of consumer credit reports, and they deny the ability for brokers to make representations or provide information on behalf of the borrower.
The changes come at a time when the CMHC has already taken other measures to ensure that Canada’s mortgage market remains healthy and stable. In October of 2013, the Canada Mortgage and Housing Corporation imposed tighter controls on mortgages insured by the CMHC, including lower loan-to-value ratios, and shorter amortization periods. These initiatives were designed to limit the amount of risk taken by lenders, while still allowing borrowers to access home ownership.
The CMHC’s most recent changes to mortgage underwriting criteria indicate that these measures will be given additional weight and enforcement from the CMHC. The idea behind the new framework is not only to better protect lenders, but also to ensure that borrowers are entering into a mortgage agreement that they can realistically afford in the long term. The goal is for mortgages to be taken out with a reasonable expectation of future repayment capacity, rather than based on an assumption of short-term affordability.
As part of the new framework, lenders are now required to assess the borrower’s income from all sources, as well as their ability to maintain their payments over a longer period of time. Lenders are also prohibited from using borrowed funds to qualify a borrower, which means that lenders must ensure that the borrower has access to the necessary funds to support their mortgage payments. Finally, lenders are required to use more sophisticated methods of assessing a borrower’s creditworthiness, such as a review of the borrower’s payment history, outstanding debt, and debt-to-income ratio.
The CMHC’s new framework for residential mortgage underwriting is meant to send a strong message to lenders, brokers, and consumers alike. Lenders need to ensure that they are taking a more thorough approach to assessing borrowers, including verifying all income sources and looking for indicators of future repayment capacity. Brokers are no longer allowed to provide representations or information on behalf of the borrower, and are expected to use professional standards when performing their duties. Finally, consumers should ensure that they are entering into a mortgage contract that takes into account their current financial situation, as well as their historical credit performance, and that they have enough financial resources to support the mortgage payments. By requiring all parties to exercise a higher level of responsibility, the CMHC is hoping to create a more stable and responsible mortgage market.
This article was contributed on Oct 17, 2023
